Inflation would be trigger for Brazil rate hike, not spending cap breach -central bank chief

BRASILIA, Oct 7 (Reuters) - Brazil’s central bank president Roberto Campos Neto on Wednesday said that any trigger for higher interest rates would be linked to inflation, not a breach in the government’s spending cap rule.

In an event hosted by JP Morgan last week, Campos Neto had said that the bank would withdraw its ‘forward guidance’ pledge not to raise rates if the spending cap is breached, three sources with knowledge of the matter told Reuters.

In an interview with Jovem Pan radio broadcast on Wednesday, Campos Neto said that he wanted to emphasize that the bank would abandon forward guidance is the government’s key fiscal rule were broken.

“It was interpreted in some way as if the central bank was saying it was going to raise interest rates, and it wasn’t that,” Campos Neto said, warning, however, that fiscal slippage could fuel inflation expectations.

“If there is a breakdown or we think that some type of creative accounting will make the long-term debt profile worse, our initial reaction is to remove this instrument (forward guidance) that forecasts lower rates for a longer time,” he said.

Brazilian markets have come under pressure in recent weeks due to growing uncertainty and confusion on how the government plans to fund its new welfare program ‘Renda Cidada’ without breaking the ‘spending ceiling’ rule that limits public spending growth to the rate of inflation.

The new program is due to replace the current popular Bolsa Familia scheme at the start of next year but will be more expensive.

The central bank’s benchmark Selic rate is a record low 2.00%. (Reporting by Marcela Ayres Writing by Jamie McGeever; editing by Grant McCool)