Brazilian Real: Fiscal risks weigh on currency – Commerzbank

Commerzbank’s Michael Pfister highlights that Brazil’s very high real interest rates have not prevented solid GDP growth, as expansionary fiscal policy has offset restrictive monetary conditions. With elections approaching and spending rising again, he warns that budget consolidation may be slow. Pfister argues that upcoming fiscal data, rather than monetary policy, will be key for the Brazilian Real in coming weeks.

Fiscal policy overshadowing monetary stance

"A remarkable phenomenon has been observed in Brazil for several quarters now. The key rate stands at 14%, while inflation has recently fallen to just under 4.5%. This is likely to correspond to one of the highest real interest rates worldwide."

"Higher levels of spending are reflected in improvements in most leading indicators of economic growth. In other words, the government has started spending more again, thereby offsetting some of the impact of restrictive monetary policy. A significant part of this development is likely to be linked to the approaching election at the beginning of October: the government has approved a large number of new spending measures in recent months."

"Market participants should be aware that it will take some time for the budget to return to balance. If growth proves to be stronger than expected, this would suggest that fiscal policy is overshadowing monetary tightening."

"Today’s GDP figures are thus less decisive for the real economy than the fiscal data due in the coming weeks. Above all, the outcome will depend on whether the government consolidates the budget after the election next month or continues to spend. In the short term, monetary policy is likely to play a rather secondary role for the real, as long as it primarily reacts to fiscal policy. We therefore continue to expect that the coming weeks will be more challenging for the real."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)