Haddad defends interest rate cuts in Brazil in a note to the IMF – 04/11/2023 – Market

In a statement to the IMF (International Monetary Fund), the Minister of Finance, Fernando Haddad, defended his proposal for a fiscal framework, stated that Brazil is committed to macroeconomic stability and said that, with inflation under control, there is room to reduce the rate of interest.

Amid disputes with the president of the Central Bank, Roberto Campos Neto, about maintaining the Selic at a high level, Haddad argues in the text that “central banks in advanced economies must continue to calibrate their monetary policy stance to combat persistently high inflation “, with prolonged pressure especially in the services sector. He makes the reservation, however, that “higher interest rates for a longer time will increase the vulnerabilities of the financial sector.”

In defending the economic agenda of the new Luiz Inácio Lula da Silva (PT) government, the minister cites the tightening of monetary policy in Brazil at the beginning of 2021, adopted during Paulo Guedes’ administration in the Economy, with signs that inflationary pressure would be persistent.

“After reaching over 12% in early 2022, the inflation rate has halved and is comparatively lower than in most advanced economies,” he says.

Haddad then points out that, as a result, credit has contracted and economic activity has weakened, but that next year, with an improvement in the general macroeconomic scenario, growth will be moderate. In the market’s expectation, inflation will gradually fall to 4% in 2024, says the text – the IMF projects 4.8%.

With more confidence in the fiscal framework and the expectation of inflation close to the target on the horizon, “there will be room for accommodation in the interest rate policy”, he said.

The communiqué was sent on Monday (10th), in the midst of the spring meetings of the IMF and the World Bank, which bring together economic authorities from around the world in Washington. Haddad did not go to the event, as he is part of the presidential delegation that went to China. Taking his place is the Secretary for Economic Policy at the Ministry of Finance, Guilherme Mello. Roberto Campos Neto also participates in the meetings.

In the text to the IMF, Haddad states that the new government wants to “demonstrate that responsible macroeconomic management is compatible with social justice and environmental sustainability” and that “the main objective is to include the poor in the budget and the rich in the tax system”. The minister cites the end of tax exemptions such as fuel as measures under the government’s responsibility. According to him, “the main priority is to maintain fiscal and debt sustainability, strengthening social programs”.

He argues that his proposed fiscal framework will stabilize the debt initially, before making it fall, and cites proposals to limit expenditure growth, stating that with this the government can have a primary fiscal surplus of 1% of GDP in 2026 .

The minister also defends the simplification of the tax system, “excessively complex, regressive, distorted and difficult to deal with, which unnecessarily burdens companies and accentuates regional and social inequalities”, he says.

Haddad also mentions the need to fight climate change and says that it is necessary to solve the problem of economic fragmentation, which reduces global activity.

This Tuesday, the IMF released its global growth projection, which points out that Brazil will grow 0.9% this year, the same value predicted by the market according to the latest Focus bulletin, and 0.1% above that projected by the World Bank last week.