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Brazilian Real faces pressure as fiscal consolidation may lag

Commerzbank notes Brazil’s policy mix has kept growth resilient, but it expects the Real to track upcoming fiscal data more than monetary policy.

Reported · Written up by our desk · EM Currencies

Commerzbank strategist Michael Pfister said Brazil’s very high interest rates have not prevented solid GDP growth, because expansionary fiscal policy has offset some of the impact of restrictive monetary conditions.

With elections approaching in early October and spending measures already approved, Pfister warned that budget consolidation may be slow, leaving fiscal risks as a key driver for the Brazilian Real in the coming weeks.

Pfister pointed out that Brazil’s key rate is 14% while inflation has fallen to just under 4.5%, describing it as one of the highest real interest rates worldwide, even as leading indicators improve on renewed government spending.

He said near-term Real performance is likely to be shaped more by forthcoming fiscal data than by monetary policy, and that the outlook could worsen in the short term if the government continues spending after the election rather than returning the budget to balance.

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