Monetary Policy, Exchange Rate and Fiscal and Political Risks
The cut of 75 basis points at the last COPOM meeting took the SELIC rate to 3%, and the communiqué indicated that another cut of up to 75 basis points at most is in store at the next meeting. The disinflationary pressure caused by the magnitude of the current recession, which in light of the behavior of the contagion curve has made the IMF’s projection that GDP will shrink by “only 5.3%” this year obsolete (an interval between 7% and 10% is more likely), justifies the Central Bank’s indication. However, all this comes in the midst of very worrying signs from the fiscal side. There is nothing wrong with increasing spending on health and income transfers to needier people in reaction to the epidemic, to the point of raising the primary deficit in 2020, with a debt/GDP ratio peeking above 90%. What is wrong is that the government has been yielding to pressures to raise spending above and beyond what is correct in reaction to the pandemic. So far Minister Guedes has been resisting pressures from within the government to raise expenditures even more, but if the recession and unemployment get appreciably worse, will he be able to resist calls for further spending increases? Few have ventured to publicly answer this question, but it appears clearly in the exchange rate and interest rates. To what point will the Central Bank take these effects into consideration? The response will be given by the communiqué of the decision of the next COPOM meeting but based on the evolution of the fiscal conditions and political situation, the future does not portend smooth sailing.
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