Brazil’s Finance Ministry cuts 2023 GDP due to high interest rates

BRASILIA (Reuters) -Brazil’s Finance Ministry on Friday reduced its estimates for economic growth this year citing the impact of higher basic interest rates on activity and credit, and it said it sees monetary easing prospects despite higher inflation projections.

The Ministry’s Secretariat of Economic Policy (SPE) now projects a gross domestic product expansion of 1.61%, down from 2.1% in November. The projection for next year was also reduced to 2.34% from 2.5%.

In a statement, the secretariat said previous estimates, made under former President Jair Bolsonaro’s government, “minimized the contractionary effects of monetary policy on the economic cycle and credit market.”

Economic Policy Secretary Guilherme Mello said the recent bankruptcy of retailer Americanas due to a multi-billion accounting scandal could partly be explained by the rapid change in monetary policy.

“It is a fact that Brazil today has the highest interest rate in the world, and this has impacted the credit market, both bank credit and non-bank credit,” he told a Friday news conference, adding that events, such as the Americanas scandal, “pushed spreads up and further undermined the possibility of raising funds for companies.”

Mello emphasized that the cost of credit is extremely high, making it difficult for companies to carry out their activities and investments.

The central bank, whose rate-setting committee meets on Wednesday, raised interest rates to 13.75% from a record low of 2% in March 2021 to combat inflation.

New leftist President Luiz Inacio Lula da Silva has consistently criticized the level of the bank’s benchmark interest rate, which has been held steady at a six-year high since September, arguing that it harms activity growth and threatens a credit crunch.

The secretariat also now sees higher inflation, at 5.31% in 2023 and 3.52% in 2024, up from 4.6% and 3%, respectively.

The official inflation target is 3.25% this year and 3% in 2024, with a plus or minus 1.5 percentage point margin.

Despite the projections, Mello stated there is “no incompatibility” in reducing interest rates with inflation above the target, arguing that monetary policy has lagged effects.

“We certainly expect (monetary easing) this year. But the sooner, the better,” he said.

(Reporting by Marcela AyresEditing by Chris Reese, Diane Craft and Aurora Ellis)