Lula pledges budget discipline but offers no new steps on high rates

what happened

Brazil's President Luiz Inacio Lula da Silva, re-elected for a fourth term, used a televised speech on Sunday to restate his commitment to fiscal discipline. He said he hoped to help push down the country's elevated borrowing costs, but did not unveil any fresh steps aimed at calming investors.

Lula promised to abide by existing budget rules and said his administration would build the conditions for cheaper borrowing. Since his victory two weeks earlier, worries about public finances had weighed on the real, lifted long-dated yields and dragged the main Brazilian stock index lower, as investors fear rising debt will go unchecked.

Those fears are fed by campaign promises that would require extra spending, and by doubts over how such pledges fit with the planned primary surplus goals. Markets are also uneasy that no finance minister has been named yet and other key posts remain unfilled, Reuters reported.

why it matters

Spending rules limit real growth to 70% of any revenue increase, and annual expenditure growth is capped at 2.5% above inflation, with a 0.6% floor. Meanwhile the central bank halted its easing cycle last week and kept borrowing costs at 13.75%. Economists now expect rates to stay high for longer and have trimmed their growth forecasts for next year.

market impact

Real and long-dated Brazilian bonds: discipline pledges ease worries, but no concrete measures yet

• ↔Brazilian real mixed — discipline pledges support the currency, but the lack of concrete measures holds it back
• ↔Brazilian long-dated bonds mixed — easing debt fears helps, yet rates stay high and uncertainty persists

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