Brazil’s Finance Minister Discusses Economic Conditions

By Marcela Ayres

BRASILIA (Reuters) – Brazil’s Finance Minister Fernando Haddad stated on Friday that high interest rates are expected to significantly impact inflation more than anticipated, countering concerns that fiscal challenges may weaken monetary policy’s effectiveness.

“I don’t believe in fiscal dominance at this moment,” Haddad told CNN Brasil, referring to a situation where central bank rate increases raise government debt servicing costs, worsen fiscal conditions, and deteriorate market expectations, thus igniting inflation instead of containing it.

“I believe monetary policy will have an impact on inflation,” Haddad remarked. “And fiscal policy needs to be more persistent.”

In light of stronger-than-expected economic growth and a notable depreciation of the Brazilian currency due to global uncertainties and local fiscal issues, the central bank indicated in December its intention to implement two additional 100 basis-point rate hikes by March. This move would increase the benchmark interest rate to 14.25%, marking the highest level in over eight years.

On the topic of currency depreciation, Haddad noted that Brazil operates under a floating exchange rate system. He stated, however, that “anything above 5.70 reais per dollar is expensive considering the country’s economic fundamentals.”

On Friday, the Brazilian real was trading around 6.05 per U.S. dollar, having fallen to nearly 6.30 by the end of last year.

Haddad also mentioned that President Luiz Inacio Lula da Silva’s plan to raise the income tax exemption threshold to 5,000 reais ($825.33) would be contingent on introducing a minimum tax on all income earned by wealthy individuals.

($1 = 6.0582 reais)