The Central Bank of Brazil to release interest rate decision

The Central Bank of Brazil is set to release its interest rates today after slashing them in August by 25 basis points to an all-time low of 2%, where they are likely to remain.

The Brazilian economy is doing worse than economists predicted, with the economy recovering only half of its losses from February to April of this year. This is Brazil’s largest annual slump, but President Jair Bolsonaro’s immense spending packages have made the country’s woes comparatively less acute. Brazil’s massive recovery program has provided monthly stimulus payments to the informally employed and unemployed, which constitute nearly a third of the population. The policy has resulted in record low poverty levels as well as increased support for the president among lower income groups.

This approach is unlikely to be sustainable as Brazil’s budget deficit will approach 11% of GDP next year. Investor uncertainty skyrocketed after Bolsonaro recently considered exceeding constitutional spending limits, a move that devalued the Brazilian real by 2.2%. Efforts to help sustain the strong but still struggling services sector will likely materialise through further demand-driving stimulus packages. However, should the government choose to wean its population off the stimulus in favour of balancing the books, it could risk losing considerable economic progress as well as crucial support for Bolsonaro’s conservative right-wing.

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