(Bloomberg) -- Brazil’s central bank president Ilan Goldfajn sat down for an interview with Bloomberg on Thursday in his office in Brasilia. He discussed expectations for fiscal austerity measures and the conditions that must be met before his board can cut the benchmark interest rate.
Here are the most important takeaways from the hour-long conversation:
Goldfajn said policy makers are monitoring investor perception of risk in the Latin American country as one of the conditions for monetary easing.
When fiscal adjustment is on the right track, “you’ll immediately see that Brazil’s country risk -- as measured by credit default swaps, the Emerging Markets Bond Index and risk premium -- will fall,” he said. "Inflation expectations will improve, and all that will give me a signal that we are addressing the fiscal question."
Goldfajn said Brazil’s real is not out of line with the economy’s fundamentals following the world’s biggest currency rally this year. The appreciation must be seen in the context of last year’s decline of 33 percent.
“We’ve had big uncertainties in the Brazilian economy and this year they have begun to dissipate,” the central banker said. “When economic and non-economic events are resolved, that diminishes uncertainty, and that’s reflected in the exchange rate.”
Brazil’s currency is free to fluctuate and will automatically adjust if it appears that a stronger real is beginning to narrow the country’s trade surplus, Goldfajn said.
“If there’s concern about the balance of payments, the currency will react naturally,” he said. “You won’t need the central bank.”
Brazil’s current account deficit widened more than economists forecast in July as recent currency gains weighed on the country’s trade balance.
Temer’s government has pledged to reform Brazil’s pension system and labor laws and has already presented a constitutional amendment to limit government spending.
“We’re not focused on approval A or approval B or approval C,” Goldfajn said. “If there’s a perception that the reforms are advancing, are moving along, that is going to be clear for everyone.”
Goldfajn said he expects some political give and take to approve unpopular fiscal measures, and only an end result that doesn’t go far enough toward reducing the budget deficit would be a red flag to policy makers that the austerity plan has fallen short.
“We all understand that any process will have highs and lows and we all know that things happen during the political process -- that’s not a surprise,” he said. “The surprise would be if at the end of the process the final project we end up with doesn’t do what it was supposed to.”
Brazil’s economy will recover only gradually next year, following one of the deepest recessions in its history, he said.
“We’re trying to move in the right direction with labor reform, emphasis on infrastructure and privatizations,” Goldfajn said. "The path is long, but at least we’re on the right path.”
Central Bank Autonomy
The central bank “without a doubt” has the autonomy it needs to decide monetary policy that will help the country reach the inflation goal set by the National Monetary Council, which includes officials from various ministries, Goldfajn said. The government is working on a bill to put the central bank’s autonomy -- but not full independence -- in the Constitution. He said it’s just a matter of finding the right moment to push for that amendment, along with the other reforms that will be presented to Congress.
“We need to write into law what is happening in practice,” Goldfajn said.
"We’re trying to resolve the middle and long-term fiscal problem. We’re trying to resolve the problem of high inflation, which has been above target for a long time. We’re trying to fix everything, trying to head in the right direction."