Turim’s Insights

July was a month marked by unforeseen events in the country’s inflationary, fiscal and monetary policy scenarios. These were some of the highlighted issues addressed in our monthly webinar.

“The month continued with the tone of inflationary surprise, pressured mainly by commodity prices and exchange rate depreciation”, assesses our partner Nelson Abrahao. “In addition, a combination of factors such as disruption in global chains, increases in fuel tariffs and the water crisis also contributed to the rise.” It is because of these surprises, explains Abrahao, that the Central Bank is acting in a spiking movement in interest rates – and Copom may announce at the end of the day yet another increase in the Selic, the country’s basic interest rate.

“The objective is to keep inflation expectations and inflation within the 3.5% target in 2022. For this, the BC must accelerate the movement of interest rate hikes in the Selic, to reach a neutral level, aiming to leave the inflation within the projected”.

For Abrahao, added to the previous factors are the fiscal risk, which, after a brief period of relief, returned to the spotlight. With the discussions on the 2022 Budget starting, the main risk that joined the conversation was spending on court orders, considered a mandatory expense, with a volume much greater than the approximately R$ 54 billion projected for this year, approaching of R$90 billion.

“The government has already announced that it is focused on increasing the coverage of social programs after the aid ends. Now, with high inflation, it is possible that court orders could consume all the space in the spending ceiling and limit the government’s range of action to expand spending,” he concludes.