Itau chief economist calls for Brazil to reinstate spending cap

Reuters

18-02-2025

BRASILIA, Feb 18 (Reuters) - The chief economist at Brazilian bank Itau, the nation's largest private lender, urged whoever wins next year's presidential elections to reinstate a spending cap to bring back "civilized" interest rates.
Mario Mesquita, at an Itau event, joined a chorus of prominent economists calling for fiscal discipline in more dire tones, even as Brazilian assets have rebounded from a late-2024 sell-off triggered by disappointment with public spending cuts.
"The only regime that allowed the central bank to pursue the inflation target with lower nominal and real interest rates, more in line with other countries, was the spending cap," said Mesquita, referring to a constitutional rule that limited spending growth to the inflation rate from 2017 to 2022.
"To think we can have civilized nominal and real interest rates aligned with global standards, with Brazil's current fiscal policy, is self-deception," the former central bank director added.
Last week, former central bank governor Arminio Fraga said Brazil was showing "severe symptoms of a patient in the ICU," with interest rate futures "through the moon," and insisted that fiscal discipline was crucial to fight inflation.
Brazil's currency has gained more than 8% so far this year, after dropping more than 20% in 2024, while interest rate futures have begun to ease after sharp gains in December.
Still, many economists remain concerned about President Luiz Inacio Lula da Silva's resistance to stronger fiscal tightening. Brazil's rising public debt has gotten much more costly as the central bank hikes interest rates aggressively to tame inflation driven by a heated economy and a weakened exchange rate.
The constitutional spending limit, approved nearly a decade ago, was initially seen as a key fiscal anchor, along with other major reforms that helped bring five-year interest rates down to around 6%, compared to roughly 14% today .
However, Lula's predecessor introduced a series of pandemic-era exceptions to the spending cap, eroding investor confidence and raising doubts about its sustainability.
In 2023, Lula replaced the constitutional spending cap with a more flexible framework allowing real expenditure growth of up to 2.5%, combined with primary budget targets.