The noises of the Lula government that disrupt the economy

Noises created by the government itself have disrupted the conduct of economic policy and, consequently, affected the mood of investors, businessmen and consumers.

The main noises are the “war” declared by President Luiz Inácio Lula da Silva (PT) against the president of the Central Bank, Roberto Campos Neto, and now friction – for the time being restricted to the backstage – between the Minister of Finance, Fernando Haddad, and the president of the National Bank for Economic and Social Development (BNDES), Aloizio Mercadante.

Lula’s criticism of interest rates, inflation targets and the Central Bank

Since January, Lula has questioned the level of the basic interest rate (Selic), currently at 13.75% per annum. He also criticizes the BC’s autonomy, in force since 2021, and the inflation targets.

“It is a source of continuous tension between two antagonistic issues: the government wants to spend more, while the BC has to keep up with the inflation targets”, says Sílvio Campos Neto, economist and partner at Tendências Consultoria.

In addition to the discomfort with interest rates, there are political issues at stake, points out political scientist Rafael Cortez, also from Tendências. “Lula does not want names appointed by former President Jair Bolsonaro (PL) in his government and this is not possible in independent bodies such as the Central Bank.”

According to him, Lula’s term begins marked by political uncertainty arising from a conflicting electoral process. The cost of adjusting public accounts has increased, assesses Cortez. “To preserve political capital, the government’s option is to act gradually.”

The head of economic research for Latin America at BNP Paribas, Gustavo Arruda, notes that since Lula took office there have been no major projects or announcements by the government. “He got into an unproductive and wrong discussion about raising the inflation target and reducing interest rates with the Central Bank,” said Arruda at an event at the Economic Observatory of the France-Brazil Chamber of Commerce (CCFB), on the 14th.

The arm wrestling match between the Executive and the Central Bank had an impact on projections for inflation and interest rates this year and the next two, and may be behind the worsening of projections for GDP in 2024 and 2025. See below how changed the market estimates collected by the BC’s Focus report:

For economist Silvio Campos Neto, the government wants to lower interest rates without focusing on technical issues. Marcos Caruso, chief economist at Banco Original, assesses that this behavior may suggest leniency in combating inflation.

Regarding changes in inflation targets, Campos Neto, from Tendências, assesses that it is possible, but it is not 100% certain. At the first meeting of the year of the National Monetary Council (CMN), the topic was not discussed.

“An alteration could cause high expectations for the IPCA”, says the economist, adding that the exchange rate and market interest rates could also rise, increasing the cost of capital and affecting the dynamics of the public debt.

“It generates uncertainty, nervousness and unpredictability, affecting the pricing of Brazilian assets. Companies and consumers end up postponing their purchase and investment decisions, which does not generate an improvement in the economic environment”, she says.

Sérgio Vale, chief economist at MB Associados, points out that the government lacks a dose of patience. “Companies only invest if there is a stable economy,” he says.

For Arruda, the noises occur in the midst of a very delicate economic moment. “It’s in the worst possible combination: a high public debt and a high carrying cost”, he says, referring to the high level of interest that the government pays to finance itself.

Although it fell to 73.5% of GDP at the end of last year, the lowest level since 2017, the Brazilian public debt has a strong upward trend in the coming years, according to financial market projections.

The main path pointed out by specialists to try to overcome this problem is the approval of a new fiscal framework, to replace the spending ceiling. The Minister of Finance, Fernando Haddad, brought forward the announcement of the new rule that the government will send to Congress for evaluation to March.

The friction between Haddad and Mercadante

Another source of noise in the conduct of economic policy are the tensions between Fernando Haddad and Aloizio Mercadante over issues related to the new fiscal framework. Although not publicly admitted by the two, friction is the subject of discussions in palace corridors and is already debated in the market.

The problems gained greater outlines at the beginning of the month, when Mercadante, president of the BNDES, said in an interview with SBT that the bank intends to hold an international seminar in March on the formulation of a fiscal framework.

The design of the mechanism that will replace the spending cap, however, is in charge of Haddad, Minister of Finance. And the discussion – within the government itself – of proposals different from those elaborated by the economic team tends to cause some embarrassment.

In the interview with SBT, Mercadante acknowledged that the theme is the Treasury, but claimed that “the BNDES has always been a formulator of public policies”. He said that by the time the seminar is held, the government’s proposal will probably already be ready. “We are going to debate the government’s proposal at the seminar. It helps the government to formulate,” he stated.

According to him, the debaters are going to discuss “what kind of fiscal responsibility we should have, how to give fiscal sustainability to the country and, at the same time, how to allow lower interest rates”. The result of the debate, according to Mercadante, will be delivered to Haddad and Lula.

The friction between the two has already turned on the warning signal at the Planalto Palace, but, according to “Valor”, Lula chose not to interfere. The relationship between Mercadante and Haddad has not been good for some time. “There’s been a lot of conflict between the two,” says Vale.

Mercadante’s initiatives sound like an attempt to make himself available to Lula, as a possible successor to Haddad. Among investors, signs of prestige to Mercadante tend to be poorly received, given the more heterodox economic opinions of the BNDES president.

The situation is calmer among the ministers of the economic area, of which Haddad is the leader, but which has two others interested in a possible succession of Lula, in 2026: the Ministers of Planning, Simone Tebet (MDB) and the Minister of Development , Geraldo Alckmin (PSB).

Despite having some interest in occupying the Planalto, Gabriel Fongaro, senior economist at JBFO, does not see any risk of “friendly fire” in the economic team. One aspect that unites them, according to him, is that they have already spoken out against the dangers of an expansionary fiscal policy.

Caruso, from Original, points out that the main stage will be Haddad’s: “His success will depend on the fiscal framework he presents”. As for Alckmin, he observes that he has adopted a more relaxed posture. Tebet, in turn, will have to promote a review of social programs, which is not a popular measure. “She is well advised,” he says.

Vale believes that there will be no room for more centrist candidates in the 2026 presidential elections. “It will be another polarized election, with PT and the right presenting strong candidates.” For him, Lula gives the impression of still being on an electoral platform, with no signs of moderation.

Congress is more cooperative and reinforces institutional action

Analysts heard by People’s Gazette point out that, despite Lula dealing with a more right-wing Congress in this term, the Legislature has been cooperative with the Executive. However, the discussion of measures such as tax increases tends to be more difficult than that of increases in spending.

Caruso, from Original, recalls that Parliament approved without major reservations the proposal for a constitutional amendment (PEC) of the Transition, known as the fury-ceiling, which released close to R$ 200 billion for Lula in expenses beyond the original limits of the expenditure ceiling .

On the other hand, analysts observe greater institutional action by Congress, defending certain positions already established and endorsed by the Legislature. This is the case of Lula’s attacks on the formal independence of the Central Bank.

Both the President of the Chamber, Arthur Lira (PP-AL), and the President of the Senate, Rodrigo Pacheco (PSD-MG), defended the BC’s autonomy.