😑 Split decision

Good morning! Today, we talk about the latest policy rate decision by Brazil’s Central Bank. What is going on with Lula’s approval numbers. And how the floods in southern Brazil will affect inflation.

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Central Bank slows down on monetary easing

The Central Bank’s Monetary Policy Committee on Wednesday cut Brazil’s benchmark interest rate by 0.25 percentage points to 10.5 percent. While a cut was widely expected, we flagged a month ago that the economic conditions both in Brazil and abroad made it less likely for the committee to continue its magnitude of easing. The six previous policy meetings had seen 0.5 percentage point cuts to the Selic rate.

Be smart. In its statement, the committee said it “has followed closely the recent developments on the fiscal side and their impacts on monetary policy,” adding that “a credible fiscal policy, committed to debt sustainability” will impact monetary policy. 

• The ink on the fiscal framework approved last year is barely dry, and the government has already asked for an easier primary target for next year. Meanwhile, Congress is keen on passing legislation that will jack up public spending.

Clear divide. More than the interest rate decision itself, markets were ticked off by the way committee members split their decision. The five Central Bank board members appointed by the previous Jair Bolsonaro administration (including the bank’s chairman, Roberto Campos Neto) formed a majority for a slimmer rate cut. 

• The minority was formed by the four committee members nominated by the Luiz Inácio Lula da Silva government — including Gabriel Galípolo, the bank’s monetary policy director and Mr. Campos Neto’s presumed successor.

 Why it matters. Even if unintended, the split will be seen as political. It also increases uncertainty around the future of Brazil’s monetary policy. Next year, seven of the nine Central Bank board members will be made up of Lula-appointees and the bank will be expected to become far more dovish than it has been. 

• Markets believe that a Lula-oriented Central Bank will not be as willing to take the bitter pill of high borrowing costs to tame inflation. That could significantly worsen economic expectations.

Exhibit A. In its statement, the committee wrote that it “unanimously judges that the uncertain global scenario and the domestic scenario, marked by resilient economic activity and unanchored expectations, require greater caution.” 

• The discord is not about the diagnosis but how severe the medicine should be.

What they are saying. Throughout 2023, members of the Lula administration bashed the Central Bank for not lowering borrowing costs fast enough. On Wednesday, it was time for Vice President Geraldo Alckmin to complain: “The government is doing its homework: negotiating reforms, rebuilding public policies, and stimulating investments.”

• High interest rates, he says, “are a deterrent to the country’s development, discouraging consumption and making public debt bigger.” 

Change in course. As The Brazilian Report analyzed back in 2022, the track record of recent Brazilian central bankers suggests that those who are more conservative — such as Mr. Campos Neto — will wait for inflation to return to expected targets before cutting interest rates.

What next. Back in March, we had already anticipated that the end of the streak of rate cuts may be close — with Wednesday’s decision being step one. The Monetary Policy Committee did not anticipate future moves, which many saw as indicative that it could stop making cuts as early as its next meeting in June.

Cherry-picking polls?

Three polls on presidential approval were released this week. While their numbers are similar, they each show different trends for President Luiz Inácio Lula da Silva’s popularity. Here’s what the three pollsters say:

Quaest. According to this institute, Lula’s approval has consistently dipped since August 2023, with his rejection curve on the opposite trend. The two curves almost touched in this week’s poll, with approval and rejection in a statistical tie for the first time since Lula began his term.

MDA. Like Quaest, MDA shows a deteriorating scenario for Lula, with his net approval rating cut by 8 points since January. According to this institute, Lula is less popular among young people, men, and wealthier voters.

Atlas Intel. Of the three pollsters with releases this week, Atlas Intel is the only one with positive news for the government: a 4-point uptick in the president’s popularity, bringing it to 51 percent. Atlas Intel says that the bump may be related to an improvement in Brazilians’ outlook for the economy. 

Cherry-picking. Media outlets favorable to Lula chose to give more visibility to the Atlas Intel poll. Those who are more critical of the president favored the two polls with negative results for the government.

 Why it matters. Polls should not be looked at as perfect snapshots of public opinion, but rather as movie reels that indicate longer-term trends. The film isn’t looking great for Lula, with concerns over security and food inflation affecting how voters see the government. 

• It is also important to note that social and cultural issues, relentlessly evoked by conservatives, may also play a big role in opinion swings.

Disaster inflation

Fecomercio, an association of Brazilian retailers, has warned that the recent floods in Rio Grande do Sul will spark food inflation. Harvest losses and infrastructure damage are expected to cause an increase in the cost of cargo transportation, which in turn makes for more expensive final products. The country’s southernmost state is Brazil’s biggest rice producer (accounting for 70 percent of the domestic demand), and rice and dairy products should be most affected.

State of play. “Just over 80 percent of the rice production has been harvested in Rio Grande do Sul, but we still can’t know if stocks were damaged and how much of the unharvested production was lost,” said Fecomercio in a statement. 

• “Due to the current conditions of the area, cattle farming for milk production is expected to be affected by the loss of cows and pasture, along with the consumption of poor-quality water by these animals,” the association adds.

• “The losses of entire crops in the region are expected to take around a year and a half to two years to begin recovering,” André Corradini, chair of land studies at Uninter university, told the press this week. “This is because floods damage the soil, washing away nutrients and its entire organic structure.”

By the numbers. Even before the disaster, rice inflation had reached 28.4 percent in March.

Purchases. The government on Wednesday authorized the National Supply Company to purchase 1 million tons of rice as a way to avoid massive price hikes. Agriculture Minister Carlos Fávaro said the government will prioritize sellers from Mercosur countries.

 Why it matters. Preliminary data from the National Confederation of Municipalities estimates more than BRL 742 million (USD 144 million) in losses for the agricultural sector in Rio Grande do Sul.

Trade. The Industry and Trade Ministry said it will monitor the impacts of the floods on Brazil’s trade balance. Rio Grande do Sul’s main exporting product is soybeans (18 percent of total shipments).

Big picture. So far, 85 percent of Rio Grande do Sul state has been affected by torrential rain and flooding. The death tally has reached the 100 mark, with another 130 people missing and almost 400 injured. The federal government is set to meet today with mayors from the state to discuss coordinated mitigation efforts.

Quick catch-up

Heavy rains hit Rio Grande do Sul again on Wednesday, forcing officials to suspend rescue operations. Storms and winds of up to 90 kilometers per hour are expected for Thursday in areas already devastated by record-breaking floods.

 A new poll shows that 64 percent of Brazilians believe the floods in Brazil’s southernmost state are linked to climate change.

Brazil’s National Development Bank (BNDES) is expected to present in July a study on ways to finance the construction of the Angra 3 nuclear power plant. Completion is expected in 2030 (construction began in 1980 and has already consumed BRL 7.8 billion).

Congress surreptitiously approved a major change to Brazil’s fiscal framework, which will allow the Luiz Inácio Lula da Silva administration to spend an additional BRL 15.7 billion (USD 3.05 billion) this year. 

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