The Central Bank gave the Lula government a “twist” by announcing, this Wednesday (11), the increase of 0.5 percentage points in the Selic rate, which reached 11.25% per year.
The decision reflects not only the level of inflation, but concern about government spending. In the post-meeting statement, the Monetary Policy Committee (Copom) emphasized that “economic agents’ perception of the fiscal scenario has significantly affected asset prices and agents’ expectations, especially the risk premium and the exchange rate”.
The Copom was unanimous in its decision, with the nine members agreeing with the adjustment. Four of them were nominated by President Luiz Inácio Lula da Silva (PT) – including the current director of monetary policy and future president of the monetary authority, Gabriel Galípolo – and five, by Jair Bolsonaro (PL), including the current president, Roberto Campos Neto.
Data from the Central Bank show that the consolidated public sector (federal, state and municipal governments, in addition to state-owned companies) recorded 15 consecutive months of primary deficit until August, with expenses exceeding revenue by 2.26% of GDP. The federal government is primarily responsible for this gap. The National Treasury calculated from January to September.
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Another concern is public debt, which in August reached 78.5% of GDP, the highest level in almost three years. Since the beginning of Lula’s third term, in January 2023, the debt has grown by almost seven percentage points.
The Copom emphasized the need for a robust fiscal policy to ensure debt sustainability and the implementation of structural measures for the fiscal budget.
Central Bank directors believe that this strategy will help bring inflation, in the medium term, closer to the 3% target established by the National Monetary Council (CMN). Since 2020, the IBGE has recorded only six occasions in which inflation accumulated in 12 months was less than 4%. Market expectations for the IPCA in 2024 were 3.9% in January, but rose to 4.59% this week, a level above the target ceiling (4.5%).
Lula government needs to be more agile to adjust public accounts, analysts say
Cláudio Pires, managing partner of MAG Investimentos, highlighted the need for “government speed” in developing structural measures to balance the budget. He warned that the Central Bank’s action in combating inflation will not be sufficient without adequate fiscal support. Raphael Vieira, co-head of investments at Arton Advisors, reinforced that a credible fiscal policy is essential to contain the unanchoring of inflation expectations and stabilize the exchange rate. The measures need to be structural, highlighted Mário Mesquita, chief economist at Itaú.
Spending cut package will be negotiated with the Chamber and Senate
The federal government is debating a package of measures to cut spending and try to rebalance public accounts. A meeting between Lula and the ministers of Finance, Planning and Management was scheduled for this morning to discuss the plan, which will include a proposed amendment to the Constitution (PEC) and a complementary bill.
Minister Fernando Haddad stated that there were only “two details” left to finalize the plan, which will be discussed with the presidents of the Chamber, Arthur Lira (PP-AL), and the Senate, Roodrigo Pacheco (PSD-MG), before its release .
Haddad highlighted that the decisions were based on fiscal viability and the chances of political approval, maintaining caution to ensure support in Congress.
On Wednesday, to RedeTV who knows the “speculative greed of the market”, stating that the government does not intend to make the cut on “the shoulders of people most in need”. He questioned whether Congress and businesspeople would accept giving up amendments and subsidies.
