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Brazil cenbank head says will abandon forward guidance if spending cap breached, sources say

SAO PAULO, Oct 1 (Reuters) - Brazil’s central bank president Roberto Campos Neto said at a private event on Thursday that the bank will retract its commitment not to raise interest rates if the government’s so-called “spending cap” is breached, three sources with knowledge of the matter told Reuters.

The cap generally limits growth in public spending to the previous year’s rate of inflation. Brazil is flirting with breaking the rule, due largely to aid payments to millions of poor Brazilians struggling with the economic fallout of the coronavirus pandemic.

“The message that he could retract the (bank’s) forward guidance under those conditions was already in recent official statements. The difference now is that he emphasized it,” said one of the sources, who, like the others, requested anonymity to discuss the proceedings of a private event.

The source added that Campos Neto indicated the bank would withdraw the guidance even if the government technically finds a way around breaking the fiscal ceiling, while still breaking the ceiling in spirit.

Economy Minister Paulo Guedes on Wednesday appeared to row back on how the government will fund its proposals for a new welfare program, saying his team had never intended to pay for it by tapping money earmarked for future debt payments.

Brazil’s currency and stocks fell, and long-term interest rates rose sharply this week on the view that accounting gimmicks would be used to expand public spending and effectively breach the cap, the government’s most important fiscal rule.

The central bank told Reuters in a statement it would not discuss the contents of the event. (Reporting by José de Castro in Sao Paulo; Additional reporting by Isabel Versiani in Brasilia; Writing by Gram Slattery and Jamie McGeever)

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