Lula's Falling Approval Is Making It Hard to Tame Inflation in Brazil

Yahoo

26-02-2025

(Bloomberg) -- Opinion polls that showed President Luiz Inacio Lula da Silva's popularity slumping to all-time lows are complicating central bank efforts to engineer the economic slowdow needed to tame Brazil's persistent inflation.
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Disapproval of the leftist leader tops 60% in some of the country's largest states, including Sao Paulo and Minas Gerais, according to a Quaest survey released Wednesday. For the first time, it exceeded his approval in key Northeastern states that have historically been the bastion of his Workers' Party, including Bahia and Pernambuco, where he was born.
With alarm bells ringing all over the presidential palace, Lula is demanding that his economic team come up with measures to boost his popularity, which has been heavily hit by a recent spike in food prices. Yet he's pushing for the same old recipe of his previous mandates, one that risks exacerbating the very inflation problem he needs to fix.
So far, he's announced cash handouts to recently graduated students, an expansion in the offering of free medication through a popular pharmacy program, and flexible rules that will give more workers the right to make early withdrawals from the nation's severance indemnity fund known as FGTS. Those withdrawals alone could inject 12 billion reais ($2.1 billion) in the economy.
And Lula keeps pushing for more, leading investors to believe the central bank led by Gabriel Galipolo will have no option but to keep raising interest rates, or at least delay cuts. The bank has already lifted borrowing costs to 13.25% in February and pledged a third straight full-percentage point hike next month.
What Bloomberg Economics Says
'President Lula does not have many options left to boost growth – and popularity – without colliding with his commitment to fiscal and price stability. The best option seems to be to reinforce the fiscal commitment and not interfere with the work of the central bank. This would allow the real to appreciate, which would help mitigate food inflation and open up space for interest rate cuts, even if not in 2025. The big risk is trying to repeat old formulas that have failed in the past, with the expectation of different results.'
— Adriana Dupita, Brazil and Argentina economist
Brazil's swap rates, which price in market bets on the future of the benchmark Selic rate, rose across the board Wednesday. The contract maturing in January 2026 jumped 11 basis points in early afternoon trade in Sao Paulo.
The real fell as much as 0.9% before paring losses, still one of the worst performers in emerging markets. It was also reflecting speculation about Lula's long-awaited cabinet changes, which kicked off with the replacement of his health minister on Tuesday.
'Acceptable' Slowdown
After expanding 3.5% in 2024, Brazil's economic growth is expected to slow down to 2.3% this year, according to official estimates. Lula is already displeased by such a performance and could push for even more aggressive stimulus measures if growth forecasts fall below 2%, according to people familiar with the president's thinking.
While members of the economic team have been warning the president that Brazilians see inflation as a bigger problem than economic activity, it's unclear whether he'll heed to the advice, one of the people said. All of them requested anonymity to discuss Lula's thinking.
The Quaest poll shows Brazilians perceive a deterioration in the country's economic situation, mostly due to rising food prices.
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