Latin America Advisor 2022-07-21 – Inter-American Dialogue

LATIN AMERICA ADVISOR

A daily publication Of the dialogue

June 13, 2022

Will More Gov’t Spending in Brazil Worsen Inflation?

Brazil’s Chamber of Deputies (pictured) last week passed a measure waiving a government spending cap that will allow for more than $7 billion in additional expenditures before the end of the year. // File Photo: Agência Brasil.

Q

Brazil’s lower house on July 13 approved a constitutional amendment that declares a state of emergency to waive a constitutional cap on government expenditures, allowing for more than 41 billion reais ($7.6 billion) in extra spending until the end of 2022. Meanwhile, Brazil’s annual rate of inflation grew in June to nearly 12 percent, the country’s national statistics agency, IBGE, said this month. The central bank has raised its benchmark interest rate to 13.25 percent, its highest level since early 2017 and up sharply from its record low of 2 percent in March 2021. Is the emergency spending decree likely to further increase consumer prices, and what is the forecast for inflation in Brazil for the rest of the year and into 2023? How big of an effect will inflation have on the country’s presidential election this October? How much will Brazil’s economy expand this year and next, and what are the most important factors that will influence growth?

A

Manuel Orozco, director for sovereign and international public finance ratings at S&P Global: “An uneven economic recovery, supply disruptions, new consumption trends, all of it exacerbated by armed conflict in eastern Europe and its impact on food and energy commodities, have resulted in high inflation in Brazil. Inflation has stood above 10 percent since September 2021. The actions of the Brazilian central bank, reversing its monetary policy stance from record-low reference rates to an already restrictive 13.25 percent are consistent with its aim to tame inflation. A significant share of the inflation is still imported and will only decline as developed economies raise their own interest rates. We forecast inflation at 8 percent by December 2022 (an average of 10.5 percent for 2022) and 4.1 percent by December 2023…”

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