February 1, 2023

Lola speaks. Exchange rates and interest rates go up

It was a quiet Wednesday at the market. Trees swayed in the wind, children walked peacefully in the square… until another meteorite struck President Lula Faria Lima’s speech, with the usual impact.

Speaking to 500 unionists at an event in Brasilia, the president spoke of correcting the minimum wage in line with GDP growth and exempting those earning up to R$5,000 from income tax – one of his campaign promises.

The intentions are the best they can be, but the data was frightening because the two measures would increase the fiscal deficit by more than R$100 billion, in the accounts of a major bank. Lula’s speech is also another “friendly fire” against Finance Minister Fernando Haddad, who is seeking ways to close public accounts.

One economist said, “Lula interrupts his minister’s work.”

Many people within Labor like to say that the market “needs” to watch the distance between presidential rhetoric and actions – and that Lula will always deliver speeches that suit his audience.

But since people never change – neither Lula nor market participants – the damage is seen in asset prices, generating volatility in the economy and making life more expensive for ordinary Brazilians. For him, presidential silence was often worth gold.

As Lula was speaking, the DI for 2027 jumped from 12.24% at 11 a.m. to 12.45% in the next two hours. DI 2029 followed the same path, from 12.33% in the early morning to 12.57% at the end of the day.

The dollar, which was dating as low as R$5.06, closed Wednesday 10 cents higher, at R$5.16 – an increase of nearly 2%.

Lula himself made it clear in his speech that the issue of exemption from income tax is not a consensus even within the Labor Party itself.

My buddies know I’m fighting with PT economists because they say if I do this [isentar trabalhadores que ganham até R$ 5 mil], drops 60% of the group. Let us change the logic and decrease for the poor and increase for the rich. Is fighting necessary? He said.

As if remarks made earlier in the day weren’t enough, Lula took to GloboNews at the end of the day to question the last bastion of market stability: the independent central bank.

Lula began to philosophize: “In this country, they fought a lot for an independent central bank, thinking it would get better.” “I can tell you, from my experience, that it is more absurd to think that an independent chief in British Columbia would do more than when the chief appointed.”

Lula also criticized the central bank’s performance in recent years, especially in setting the inflation target.

“Why is the central bank independent and inflation and interest rates the way they are? You set an inflation target of 3.7%. When you do this, you are bound to “crush” the economy even more to reach the target. Why did it need to get to 3.7%? Why not do 4.5% like we did ?

Fernando told him.

Geraldo Samour