Lula’s jabs at Central Bank don’t alter interests forecasts

As Brazilian markets return from the Carnival break, the Central Bank released its latest Focus Report, a weekly survey on economic forecasts of top-rated market agents. 

Markets don’t believe the monetary authority will alter its stance on benchmark interests (currently at 13.75 percent), despite President Luiz Inácio Lula da Silva’s recent rants on how high borrowing costs are in the country. The government believes the current rates will excessively cool off the economy and plunge the country into a recession.

But while Lula successfully dominated the public debate in recent weeks, analysts surveyed by the Central Bank kept their year-end forecasts at 12.75 percent and next year’s at 10 percent. The only change from last week was an upward revision for the 2026 year-end interest rate — from 8.5 to 8.75 percent. 

If anything, long-term expectations are getting worse, not better.

In a report released last week, the Independent Fiscal Institute (a think tank operating under the Senate’s umbrella) pointed out that the benchmark Selic rate has remained unchanged and future expectations have become consistently worse because investors are uncertain about the behavior of the inflation curve and how austere the government will be. 

“Although there is an adjustment plan already announced by the Finance Ministry which alleviates doubts on how to finance the expansion of spending, the future of public accounts remains undefined,” reads the document. 

Last week, Lula pledged to raise the minimum wage and the income tax threshold, a move aimed at jolting the economy. Market agents, however, worry about the fiscal impact of both moves.

The economy is starting to feel the effects of monetary tightening, with several sectors slowing down, says the Brazilian Institute of Economics at think tank Fundação Getulio Vargas. The institute projects meager 0.2-percent growth in 2023 — but without positive results from the agribusiness sector, the result would be a 0.4-percent contraction.

Meanwhile, business owners’ confidence levels are shrinking and the job market is losing steam.

• #centralBank
• #interestRate