Those remarks came a day after the central bank signaled it could hold interest rates at a six-year high for longer than markets expect due to fiscal risks under Lula. Rafaela Vitoria, chief economist at Banco Inter, said the president's criticism was spooking investors as it reduced the credibility of monetary policy, which is seen as subject to growing political interference. "The experience of interference in monetary policy, both from our history and examples from other countries, shows that its effect can be even more negative for inflation, unanchoring expectations and generating more inflationary pressure," she said. The dollar rose 1.8% against the Brazilian real, also boosted by surprisingly strong U.S. jobs data. Brazil's interest rate futures also rose more than 1% in both short and long maturities. Brazil's benchmark Bovespa stock index was down 0.5%. Analysts said Lula's comments were weighing on asset prices, with no truce in sight since the leftist president reiterated that "the interest rate issue" is on the agenda. Lula also suggested that the country should aim for a "Brazilian standard" for inflation rather than a European one.
"I believe the insistence on this discourse against the central bank and its inflation target could be a meaningful negative inflection point for the country," wrote Dan Kaya, head of investments at TAG Investimantos, in a note to clients.
The central bank reaffirmed in its Wednesday policy statement "its commitment to set monetary policy to meet the targets" in what was read by many as a message of opposition to eventual changes in the official inflation goals.
Vitoria acknowledged Brazil has the highest real interest rate in the world. Still, she said it is closely linked to fiscal risks after Lula pushed a spending package bypassing a constitutional cap without proposing another budget rule. "The solution is not to reduce the benchmark interest rate Selic by force, but the definition of a credible fiscal rule, which shows the way to reduce the public debt, and then, yes, we will have room for a drop in interest rates in Brazil," she said. (Reporting by Marcela Ayres Editing by Brad Haynes and Alistair Bell)
