Central Bank puts pressure on Lula. Markets welcomed the move

The awkward dance between the Central Bank and the government is getting more uncomfortable by the minute — which each side one-upping the other, in its own way, in an escalating (and very public) feud over interest rates.

As we described in today’s edition of our Brazil Daily newsletter, the Central Bank used the much-anticipated minutes of its latest policy meeting to send several messages to the Luiz Inácio Lula da Silva administration. The wording of the minutes all but confirmed that, as things stand, the bank is more likely to raise interest rates from the current level of 13.75 percent than to cut them. 

There were also not-so-subtle comments on positions voiced by members of the administration — from the president himself, who defended raising inflation targets to make them more achievable (the bank noted that inflation expectations have worsened in a process “partly related to the questioning about a likely change in future inflation targets”), to the head of Brazil’s National Development Bank, Aloizio Mercadante (warning against the “possible adoption of expansionary parafiscal policies, which can increase the neutral rate and reduce the power...