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Is Brazil a More Serious Inflation-Fighter Than Europe?

Has Brazil become a more serious inflation-fighter than Europe? I have just returned from the South American country and once again I was surprised by the changes afoot, both economic and political. Brazil is expanding at a breathtaking pace. The country is richer and more prosperous than just a few years ago. More interesting perhaps is the economic debate in the media as well as in politics. During my stay, I was struck by how serious and well-argued such debates can be, compared with Europe.

Like the rest of the world, Brazil must cope with a surge in inflation, currently around 6% on an annual basis, still in line with the central bank’s wide target but awfully high. That said, the Banco central do Brasil was quick to increase its official interest rate to 13%, in July. It was the third hike in four months, for a total increase of 175 basis points. The latest 75 basis-point increase caught markets by surprise. The central bank’s decision was criticized by the country’s economic establishment as business leaders were expecting a smaller 50-basis-point monetary tightening. Companies complained saying that fighting inflation should not rely solely on monetary policy but also on spending cuts. On this issue, the government has had a surprisingly orthodox position in the last few months. The Finance Minister Guido Mantega has argued that the surge in inflation had to be fought through an increase in the budget primary surplus. Therefore, the government’s 2008 goal was increased to 4.3% of GDP, from 3,8%. A few days ago, Luiz Inácio Lula da Silva, a trade unionist turned president, signalled his priorities clearly: "I know that inflation hits the poorest people the hardest. So I consider the fight against inflation to be a matter of personal honor". How many European governments reacted in a similar way when the European Central Bank hiked rates at the beginning of July? The picture in Europe is clearly different from the one in Brazil: while the latter is growing briskly, the former is stagnating, at best. In any case, the current debate in Brasilia or in São Paulo is telling. It suggests a growing maturity of the Brazilian people and that optimism for the future of the country is well placed.