The Brazilian Central Bank’s monetary policy director and future president of the Central Bank, Gabriel Galípolo, said that the institution will not interfere in the depreciation of the country currency, Real. He added that the floating exchange rate is one of the pillars of the country’s economy.
This Monday, December 2nd, The Brazilian real started de week slipping to more than US$6.00 per U.S. dollar.
What is behind the current depreciation?
Brazil’s government on Wednesday (27) proposed to expand income tax exemptions for lower-income Brazilians and increase taxes on those who earn more, while outlining plans to trim public spending in coming years. Brazilian markets sank ahead of the announcement.
Fernando Haddad, the finance minister, described the new initiative as “the biggest income reform in our history. It proposes to raise the tax-free threshold to 5,000 reais ($842) per month from 2,824 reais per month, while making up for the lost revenue with higher taxes on those earning over 50,000 reais.
The bigger tax exemption carries out a campaign promise by leftist President Luiz Inacio Lula da Silva.
The market reacted because it was expecting something more concrete, relevant, on spending cuts and the announcement on income tax went in the opposite direction.
Haddad did announce some measures to control public spending, but not the reform that the market was expecting.
Many economists have warned that, without reforms to curb mandatory spending, the framework would become unsustainable within a few years.
Sources: Uol and Reuters