Lula’s Economic Team Fears High Rates Will Push Him to Overspend

Martha Beck
·3 min read
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(Bloomberg) -- Brazil central bank’s high interest rate strategy is likely to encourage President Luiz Inacio Lula da Silva to try to shore up the economy via greater public spending, according to two members of his economic team worried about a possible lack of coordination between the country’s fiscal and economic policies.

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Faced with a weakening economy and 13.75% interest rates that’s increased the government’s debt service bill, Lula is likely to consider boosting spending, credit and investment, the people said, asking for anonymity to describe the sense of unease permeating the team.

Finance Minister Fernando Haddad and his group are under pressure to revive the economy, reduce Brazil’s budget deficit in 2023 and come up with a credible rule to balance it over the medium term. They will now have a tougher time convincing their boss not to keep loosening the purse strings this year, the people said. The finance minister declined to comment.

Not only is economic prosperity a campaign pledge by the leftist leader, but it could also help bring political stability to a nation that’s still reeling from a divisive election. After a narrow victory over Jair Bolsonaro in October, Lula was confronted with an insurrection by radical supporters of the former president who tried and failed to unseat him just a week after his inauguration.

Since taking office on Jan. 1, the president has been promising to stimulate growth through public spending and credit. He has ordered the economic team to find ways to increase the minimum wage above the rate of inflation during the entirety of his mandate. He intends to announce on May 1, when the country celebrates Labor Day, that Brazilians earning up to two minimum wages per month, or 2,604 reais ($503), will be exempt from income tax.

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But most of his plans face a major obstacle: borrowing costs that remain at a six-year high, following an aggressive monetary tightening campaign by the now autonomous central bank led by Roberto Campos Neto.

Over the past few weeks, Lula has been escalating his feud with the monetary authority in a series of interviews and speeches. He has questioned a law that gave the institution its long-sought autonomy in 2019, complained that “too tight” inflation targets are choking the economy, and more recently called on businesspeople to join him in protesting the level of interest rates.

Read More: Brazil Central Bank’s Harsh Statement Upset Lula, Economic Team

Yet his complaints have only made things worse for the economy.

Fears of political meddling in monetary policy have weighed on the Brazilian real, boosted long-dated swap rates as well as expectations for consumer price increases. The deteriorating scenario led the central bank to caution last week that it may be forced to keep interest rates at the current level for longer until confidence in its inflation targets are restored, further infuriating the president.

Minutes of last week’s rate-setting meeting, published on Tuesday, made no relevant changes to that hawkish message, although Haddad tried to defuse tensions with the central bank by describing the document as “more analytical and amicable” than the previous statement.

--With assistance from Maria Eloisa Capurro.

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