Inflation and Fiscal Risk at Center Stage
Since (belatedly) starting the monetary tightening cycle, the Central Bank has been revealing greater concern over economic recovery than growth of inflation. Even with the steady increase of the diffusion index and all the core rates, after three increases of 75 basis points the SELIC rate was still zero in real terms. Finally, at the last COPOM meeting came the announcement that the Bank would do whatever it takes to bring inflation to the target.
Our estimate is that to attain this objective, the SELIC rate will have to reach 7.75% by the end of this year. It is against this backdrop of real interest rates above the neutral level and deceleration of the global economy that we will have to evaluate the fiscal policy perspectives. For some time now, the illusion has held sway of improvement in the fiscal situation, reflected in appreciation of the Real. But this has been a temporary improvement, unrelated to fiscal policy.
The increase of inflation has helped expand tax revenue and lowered the primary deficit, contributing to reduce the debt/GDP ratio. Along with this, there was some “breathing room” in the spending cap due to the contribution of inflation greater than 8% in June 2021. The optimism was already cooling off when the government’s collaboration with the Centrão led to the appointment of Ciro Nogueira to be the new presidential chief of staff, facilitating higher spending. It suffered another setback when the economy minister ignored the warnings of the AGU about payment of judicial credit warrants (precatórios) in 2022, instead suggesting unconventional maneuvers to escape from the problem, preferring to utter one of the most inopportune phrases of the vast repertoire of debtors everywhere: “I don’t deny the debt, but I’ll only pay when I can”.
Now read on...
Register to sample a report