Lula Flays Brazil’s Monetary Policy Days Before Central Bank Meets Over Rates

Central bankers led by Roberto Campos Neto are expected to hold borrowing costs at 13.75% for the sixth straight meeting this week

Brazil President Luiz Inacio Lula da Silva.
By Matthew Malinowski
May 01, 2023 | 09:06 PM

Bloomberg — Brazil President Luiz Inacio Lula da Silva renewed his attacks on the nation’s monetary policy on Monday, just days before the central bank is expected to hold its benchmark interest rate steady at a six-year high.

“We can no longer live in a country where the interest rate does not control inflation,” Lula said at an event in Sao Paulo to commemorate the Labor Day holiday. “In fact, it controls unemployment in this country, because it’s responsible for a part of the situation that we are living today.”

Central bankers led by Roberto Campos Neto are expected to hold borrowing costs at 13.75% for the sixth straight meeting this Wednesday as consumer price forecasts remain above target. While headline inflation has eased over recent months, core measures that strip out volatile items are running hot. The monetary authority’s stance has provoked the ire of Lula and some of his closest allies, who say the policy is hurting both the poor and investments.

In his speech, Lula vowed to create jobs and assured that women and men will receive equal salaries for the same work. He said his government is studying exempting workers from paying income taxes on profit sharing.

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Capital Income

Late on Sunday, Lula announced an increase to the monthly minimum wage and the exclusion of more low-earning workers from income tax requirements.

At the same time, the administration published an executive order that taxes capital income on financial investments obtained abroad by residents in Brazil.

Starting Jan. 1, 2024, any such income of as much as 6,000 reais ($1,202) will not be subject to levies, while amounts between 6,000 reais and 50,000 reais will be taxed at a 15% rate and earnings above 50,000 reais at 22.5%.

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The measure can generate income of roughly 3.25 billion reais this year, 3.59 billion reais in 2024 and 6.75 billion reais in 2025, according to a Finance Ministry statement Monday.

Meanwhile, the changes to income tax brackets will reduce income by 3.20 billion reais in the remainder of this year, 5.88 billion reais in 2024 and 6.27 billion reais in 2025.

In March, Lula’s administration presented a plan aimed at strengthening Brazil’s public finances, which was cautiously welcomed by investors.

This week’s announcements follow a batch of positive data in Latin America’s largest economy. A proxy for gross domestic product came in well above expectations in February, while inflation slowed to the lowest since 2020.

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