A Hostile World Demands Coherence in Economic Policy Management

BRAZIL ECONOMICS - Report 17 Jun 2024 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

The depreciation of the Brazilian real, which began late last year, has gained momentum in recent months. Part of this movement occurred alongside the appreciation of the dollar, but recently domestic factors have been predominant. The currency weakening occurs despite a positive exchange flow, driven by the Trade Balance results and the internalization of some export revenues.

Additionally, the equilibrium real exchange rate is appreciating, following the reduction of the current account deficit. Thus, the main factor behind the devaluation of the real in recent months has been the increase in risk premiums, chiefly associated with fiscal policy, which are expected to remain high. To prevent further deterioration of public accounts, it is necessary to contain the rapid increase in expenditures, but this agenda faces resistance from President Lula and his party, PT.

As for external factors, the Fed indicated only one more rate cut this year, while in Europe, the continuation of monetary policy easing will depend on labor cost developments. The environment of high international interest rates while high risk premiums persist locally, as a result of worsening economic policy fundamentals, should continue to maintain high volatility and a weak exchange rate.

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