As Elections Near, Can Brazil Keep Control of Inflation?
WHY YOU SHOULD CARE
The economy could determine the direction the country’s coming elections take.
By Joe Leahy
At a street market in São Paulo, domestic helper Maria Ferreira da Silva complains about the price of vegetables in Brazil’s largest city.
“Before potatoes were R$2, but now you won’t buy them for R$3 or R$4 a kilo — double the price,” she says.
She concedes, however, that the prices of some other Brazilian food staples, such as rice and beans, have fallen. Indeed, while ordinary Brazilians — hit hard by recession, unemployment and past inflation — may not yet be feeling it, economists say Brazil is experiencing one of its most benign moments for consumer price rises in years.
In March, the mid-month key consumer price index, the IPCA-15, rose 0.1 percent compared with a month earlier. It was the lowest rate for March in 18 years. The subdued inflation has emboldened the central bank to slash interest rates to record lows, fostering hope among analysts that Brazil’s long-suffering economy may be entering a prolonged burst of growth without overheating.
Whether all of this will translate into much stronger economic growth remains to be seen …
This would be a rare moment for Brazil — Latin America’s largest economy has traditionally struggled with inflation, which in the early 1990s reached rates of nearly 5,000 percent a year. “Maybe we’ll go through an extended period of lower inflation and therefore lower-than-expected interest rates,” says Tony Volpon, an economist with UBS in São Paulo. “This is not going to be a ‘forever’ change, but it is going to last for a long time.”
The easing in prices could not have come sooner for consumers or for the government of Brazil’s center-right president, Michel Temer, which is facing elections in October. With the country suffering its worst recession in history in 2015 and 2016, unemployment hit a high of more than 13 percent.
But since peaking at nearly 11 percent in early 2016, the key month-end IPCA index fell to 2.84 percent year-on-year in February — below the bottom of the central bank’s target band of 4.5 percent plus or minus 1.5 percentage points.
This has enabled the central bank to cut its benchmark Selic interest rate 12 times in less than 18 months. Last week, it cut the Selic again by 25 basis points to 6.5 percent and signaled a further reduction in May. The cuts are lifting the mood in São Paulo’s capital markets.
“Because of the recession and still-high unemployment, there is space for significant growth while maintaining low interest rates,” says Rogério Pessoa, head of wealth management at investment bank BTG Pactual.
Economists are divided on how long the benign inflationary environment will last. UBS’ Volpon says that while Brazil had its own idiosyncrasies, advanced economies experienced prolonged periods of low inflation with growth after the great financial crisis.
“We have seen similar things happen in other economies that suffered great recessions, so maybe there is an analogy here,” Volpon says.
Some reforms undertaken by the Temer government, such as changes to make labor law more flexible and the phasing out of subsidies on loans from Brazil’s main long-term lender, development bank BNDES, could also contribute to reducing inflationary pressure in the economy, he says.
Others, however, say the situation is cyclical. Many aspects of the Brazilian economy are still indexed to historical inflation, such as the minimum wage, says Goldman Sachs economist Alberto Ramos. This means that when inflation was high, the indexing kept it high. But when inflation is low, the indexing acts in reverse and keeps it low. He says the effects of the recession and unemployment had combined with strong harvests to push prices down. “Don’t think we have slain the dragon of inflation forever, because part of that is just cyclical rather than structural,” Ramos says. “Part of that is a reflection of food prices … and part of that is also a reflection that we have a huge amount of slack in the economy.”
Whether all of this will translate into much stronger economic growth remains to be seen. The economy grew just 1 percent last year. Economists surveyed by the central bank were predicting growth of less than 3 percent this year. “It’s a gradual recovery and nothing out of the ordinary given how deep a hole we are climbing from,” Ramos says.
For the country’s established political classes, the hope is that voters will start to feel some of these positive effects before the election. The recession, collapsing public services and corruption scandals have boosted political “outsiders,” such as far-right presidential candidate Jair Bolsonaro, analysts say.
But judging from the customers at the vegetable market in São Paulo, the positive macroeconomic headline data is not yet offering much relief to the masses.
“Everything is more expensive,” says Valéria Spinola, who works in aged care. “Before we would take R$100 with us to the market; today it’s R$200.”
Additional reporting by Carina Rossi in São Paulo
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