Brazil's Finance Minister, Fernando Haddad, expressed on Friday that high interest rates are expected to have a stronger impact on inflation than anticipated, dispelling concerns that fiscal challenges might compromise monetary policy effectiveness. Haddad stated to CNN Brasil, I don't believe in fiscal dominance at this moment, rejecting the notion that rate hikes could escalate government debt costs and worsen fiscal conditions, consequently fueling inflation.
Asserting faith in the impact of monetary policy on inflation, Haddad commented, I believe fiscal policy needs to be more persistent. The Central Bank's decision in December to raise rates twice by 100 basis points each by March highlights the country's economic growth and the sharp depreciation of the Brazilian currency due to global uncertainties and local fiscal worries. This move would elevate the benchmark interest rate to 14.25%, its highest level in over eight years.
Addressing the weakened Brazilian real, Haddad acknowledged the country's floating exchange rate system but remarked that anything above 5.70 reais per dollar is costly considering the economic fundamentals.
Haddad further outlined President Luiz Inacio Lula da Silva's plan to increase the income tax exemption threshold to 5,000 reais ($825.33), contingent upon introducing a minimum tax on affluent individuals' total income. Amid concerns about reining in public debt growth, the proposal generated apprehension among investors and triggered a sell-off in Brazilian assets when unveiled late last year. Haddad clarified that the tax adjustment proposal is set for submission this year for implementation in 2026 and is anticipated to prompt rigorous debate in Congress.
Additionally, efforts are underway to establish a mechanism excluding tax-exempt revenues from individuals' total income calculation, as long as the revenues are distributed by companies fully compliant with corporate tax obligations.