Brazil's largest private lender, Itau, had its chief economist urge the winner of next year's presidential elections to reintroduce a spending cap in order to lower interest rates to more "civilized" levels. Mario Mesquita, speaking at an Itau event, stressed the importance of fiscal discipline, aligning with other economists' calls, especially following the late-2024 sell-off due to public spending cuts.
Mesquita emphasized that the "spending cap" regime was crucial for the central bank to maintain lower nominal and real interest rates, comparable to global standards. He warned that achieving such rates with Brazil's current fiscal policy would be self-deception, highlighting the necessity of fiscal responsibility to combat inflation.
Former central bank governor Arminio Fraga echoed these concerns, likening Brazil to a patient in intensive care, with soaring interest rate futures. Despite recent improvements in Brazilian assets, economists worry about President Luiz Inacio Lula da Silva's reluctance towards stricter fiscal measures.
The constitutional spending limit, established around a decade ago, was considered a vital fiscal safeguard alongside other reforms that helped decrease five-year interest rates. However, exceptions implemented during the pandemic have undermined investor confidence. Lula replaced the spending cap in 2023 with a more adaptable framework, allowing for increased expenditure and setting primary budget goals.