Overheating has led the Brazilian government to take action to alleviate inflationary pressures, budget and planning minister Miriam Belchior has acknowledged.
“We reached a set of limits that could not be broken without risks,” she told Emerging Markets in an interview.
Senior Brazilian officials have previously failed to acknowledge that Latin America’s largest economy, which posted 7.5% growth last year – a 25-year high – was indeed overheating, even though inflationary pressures resurfaced and price increases spread from food to a whole range of services.
“From our point of view, 7.5% [growth] is a bit much in the current circumstances in Brazil,” Belchior said.
Headline inflation is running at more than 6%, and monetary authorities have used a combination of interest rate hikes and macro-prudential measures to bring the consumer price index closer to the target of 4.5%.
The government announced $30 billion worth of budget cuts last month, which Belchior is in charge of implementing – without hurting badly-needed investment to modernize infrastructure.
“The government has been working on various fronts”, she said. “This fiscal consolidation process will help the central bank, which has operational autonomy, to cut short the interest rate curve [i.e. to shorten the tightening cycle].
“I think we have to walk with both legs ... This is President Dilma’s concern. She asked the main economic policy makers in government – the president of the Central Bank, the finance minister and myself as planning minister – to work collectively in order to move forward,” Belchior said.
This approach contrasts markedly with the previous government’s. Its finance ministry’s fiscal policy was often at odds with the Central Bank’s monetary policy.
Persio Arida, a former central bank governor, said in an interview in São Paulo: “The government is targeting cooling off the economy and bringing inflation down. Obviously this is a marked change from what happened last year.”
There are still doubts as to whether the government’s strategy will work. André Loes, HSBC’s chief economist in São Paulo, said: “This combination of monetary and quantitative tightening will help cool domestic – and particularly, consumer – demand, but not sufficiently to bring GDP growth to below potential.”
Loes thinks Brazilian policymakers are still short on monetary and short on fiscal policy.
Furthermore, the Brazilian government has yet to signal whether the fiscal adjustment is a clear policy option to rein in public spending in the long term, or just directed at temporary cuts on current expenditure.
“We have started discussing this for this year. Next year we will discuss a bit later,” Belchior said.
Further reforms are under consideration by four interministerial groups, including an economic development forum that will determine which measures are important to sustain economic growth.