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ECONOMY | 03-04-2023 12:08

Brazil’s inflation expectations level off after fiscal plan

President Luiz Inácio Lula da Silva’s government presents a highly-anticipated fiscal rule proposal to help control the growth of public debt.  

Brazil analysts kept their inflation forecasts for next year and beyond unchanged after President Luiz Inácio Lula da Silva’s government presented a highly-anticipated fiscal rule proposal to help control the growth of public debt.  

Expectations for consumer price increases remained steady from the previous week, at 4.13 percent for 2024 and 4 percent for 2025, interrupting a string of increases, according to a Central Bank survey of economists published Monday. The annual inflation rate will tick up to 5.96 percent this December, slightly higher than prior estimate of 5.93 percent, the analysts forecast.

Policymakers led by Roberto Campos Neto held interest rates unchanged at 13.75 percent last month for the fifth straight meeting as they battle expectations that consumer prices will keep rising at an above-target pace through 2025. Inflation slowed down for the 10th consecutive month to 5.36 percent in early March. 

Last week, Finance Minister Fernando Haddad presented a new fiscal framework that was initially welcomed by investors. The plan sets targets for surpluses before interest payments and now needs to be debated in Congress. Haddad’s team expects the new rule to help central bankers lower interest rates — which have become a sensitive topic since Lula started criticising the central bank’s tight monetary policy. 

Lula’s complaints have resonated with the population. Only 17 percent of Brazilians say interest rates are “adequate,” while 71 percent consider them “higher than they should be” and 80 percent think Lula is right to put pressure on the monetary authority, according to a Datafolha survey published on late on Sunday.

Analysts surveyed by the Central Bank forecast that the key interest rate will fall to 12.75 percent by December and 10 percent by the end of next year. It’s still unclear how much space for rate cuts the new fiscal framework may give policymakers. Last week, Campos Neto said he needs time to study the plan, though pointed to “goodwill” from the finance ministry to tame growing debt levels. 

JPMorgan & Chase Co said the plan is not enough to guarantee rate cuts before November. 

“While the predictability of the fiscal framework is welcome, the rule does not seem to be enough to stabilise debt-to-GDP,” economist Cassiana Fernandez wrote in a report. “Moreover, there is still no clarity on what will be announced regarding revenues in the coming weeks, which directly impacts the government’s plans to reach the primary budget target.”

by María Eloisa Capurro, Bloomberg

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