Fiscal

In this report, we explore Brazil’s inflation and monetary policy outlook, the Lula administration’s back-and-forth between pragmatism and populism, and how these factors will affect Brazilian financial markets going forward. All in all, we believe Brazilian risk assets will be in a trading range relative to their EM peers in the next 12 months.

Falling inflation enables central banks to pause rate hikes, which is good news. But time goes on. Restrictive monetary policy, Chinese debt-deflation, energy supply shocks, US and global policy uncertainty, and extreme geopolitical risks will undermine hopes of a soft landing and beautiful disinflation.

The Politburo meeting in late July will set the course for economic policy for 2H23. We think China will only resort to "irrigation-style" stimulus if something breaks in the economy and/or financial markets. Furthermore, the gradual and targeted rounds of stimulus are unlikely to boost economic activity considerably. The reasons are the diminished efficacy of the monetary transmission mechanism and the unique features and constraints of the nation’s fiscal system.