A meeting of the leading economic policy figures in Brazil this week highlighted President Lula de Silva’s difficulty in presenting a credible economic agenda. Having established plans to remove constitutional spending caps, the cabinet has reportedly been at odds on how to finance Lula’s ambitious social spending without pushing debt, currently at 77% of GDP, to unsustainable levels.
The uncertainty around the country’s new fiscal framework has compounded market nervousness over the direction the fledgling administration will take for managing Latin America’s largest economy. Without a clear fiscal path, Lula and his lieutenants have taken to sharply criticizing the newly independent central bank’s 13.75% interest rate as preventing growth.
While markets have reacted poorly to the attacks on central bank independence and the prospect of higher inflation in turn, the central bank has pushed forward with its plans.