MercoPress. South Atlantic News Agency

Brazil Poised to Raise Rates and Make Significant Cuts in Government Spending

Lula da Silva: economic stability and controlling inflation are the main targets

Brazilian President Lula da Silva on Wednesday said the country's interest rates could go up again this year “if necessary,” even in the run-up to the presidential election. Brazil is holding elections next October and will be voting for the successor of Lula da Silva who is barred from running a third consecutive mandate.

“Economic stability and controlling inflation are obligations for us,” Lula da Silva said in a televised interview. “If (rates) have to go up, they will go up,” he said when asked about a possible second rate hike this year. “I would never allow the economy to go off the tracks because of an election,” he said.

Earlier in the day, Finance Minister Guido Mantega said that there would be “significant” cuts in government spending to “cool domestic demand” and to avoid overheating. The Brazilian government recently raised its growth forecast for 2010 to 6% and Central Bank of Brazil last month increased its benchmark lending rate to 9.5% in an aggressive 75 basis point increase on signs the country's economy may be overheating.

“One of the instruments to reduce overheating is reducing government spending,” said Mantega. “We review the federal budget every two months and the next time will be May 20, but I can anticipate a significant cut. It will have a greater impact that raising interest rates,” he added.

Brazil was one of the world’s largest economies to first come out of global recession last year, mainly on significant tax cuts which spurred domestic demand but had an impact on government finances. Last March, Brazil reported its worst consolidated primary budget for that month in the last ten years.

However, Mantega said he was confident April data would signal an interesting improvement which would put Brazil again on the path to achieve the target of an annual budget primary surplus of 3.3% of GDP this year. “I can assure you we will reach the target. April will have a good performance and show us the way to the primary surplus,” said Mantega.