The De Facto End of the Spending Cap and the Central Bank’s Reaction

BRAZIL ECONOMICS - Report 26 Oct 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

Last week, the spending cap rule ended. The increase of the Bolsa Família program and other transfers to the needy is only part of the spending increase, whose real objective is to increase the president’s popularity and satisfy his congressional base. As could not otherwise have occurred, the risk premiums increased: the entire structure of the yield curve shifted upward, and the exchange rate weakened.

This has worsened the outlook for inflation. The Central Bank will have to intensify its tightening, with two increases of the SELIC rate by 150 basis points at the next two COPOM meetings, putting the basic interest rate in two-digit territory at the start of 2022, without any assurances this will be the end of the upward cycle.

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