Brazil’s Central Bank warns of extending stimulus measures

Trailing in the polls, President Jair Bolsonaro is not sparing any effort to generate badly needed economic feel-good factors and win more votes for his re-election bid. However, the possible extension of temporary income support policies could raise the country’s risk premiums and inflation expectations, the Central Bank said Tuesday.

In minutes from the institution’s Monetary Policy Committee meeting — which last week raised the benchmark interest rate Selic by 0.50 percentage points to 13.75 percent —, the bank had already indicated that it could end the country’s aggressive tightening cycle with a smaller bump in September, probably of 0.25 points.

Nevertheless, the institution said it will remain vigilant and “will assess whether only the prospect of maintaining the basic interest rate for a sufficiently long period” will ensure “the convergence of inflation to the target in the first quarter of 2024.”

Per the Central Bank, the impacts of high interest rates “should be clearer in the activity indicators for the second half of next year.” However, “measures to support aggregate demand, which will be implemented in the short term, should make it difficult to make a more accurate assessment of the stage of the economic cycle and the impacts of monetary policy.”

Arguing that the adoption of emergency measures was necessary due to the consequences of the war in Ukraine, the Brazilian government has made payments outside the spending cap to double the cash-transfer program Auxílio Brasil and create benefits for truckers and taxi drivers.

These measures are only valid until December this year, but Mr. Bolsonaro and former President Luiz Inácio Lula da Silva have already indicated that they intend, for instance, to maintain the current increase to the Auxílio Brasil program. 

Although markets have lowered inflation forecasts for this year in view of the impact that these measures are expected to have on demand, inflation optimism is confined to this year alone, with analysts steadily raising expectations for 2023 consumer goods prices over the past 17 weeks. This scenario should pressure the Central Bank’s monetary policy, which raises interest rates as a way of taming inflation. 

Soaring prices and interest rates are also likely to hurt Brazilians’ ability to pay their bills, which is already hampered.

New data from the National Confederation of Commerce (CNC) shows that 78 percent of Brazilian families were in debt in July, and 29 percent of them were unable to pay their overdue bills — the highest level for these indicators since 2010.

• #centralBank