Why Lula must pander to the markets. Fast

In its first policy meeting of the year, the Brazilian Central Bank’s Monetary Policy Committee kept the country’s benchmark interest rate stable at 13.75 percent, where it has been since last August. 

In a statement, the committee said the scenario looks “particularly uncertain on the fiscal side and with inflation expectations drifting away from the inflation target on longer horizons.” The bank added that it will keep interest rates at current levels “until the disinflationary process consolidates and inflation expectations anchor around its targets, which have shown deterioration at longer horizons since the previous meeting.”

As in previous meetings, the committee said it “will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.”

The Central Bank’s concerns about fiscal risks are echoed in financial markets. Investors — especially domestic ones — have reacted badly to President Luiz Inácio Lula da Silva’s recent statements on the need to boost social programs and loosen inflation targets. Lula also took a swipe at the independence of the Central Bank — a reality since 2021, designed to shield monetary policy from political interference.

“There is a lot of uncertainty about the government’s commitment...