Brazilian presidential campaigns clash over plans to lower long-term interest rates

Brasilia, Brazil. Brazil’s presidential campaigns are clashing over how to reduce long-term interest rates, with advisers to the leading candidates offering sharply different proposals to lower borrowing costs across the economy. The debate has intensified ahead of the October 4 election as investors demand substantial premiums for long-dated government bonds.

Bond buyback proposal

In an interview published in Tuesday’s edition of Folha de S.Paulo, Jose Sergio Gabrielli, chief coordinator for President Luiz Inacio Lula da Silva’s re-election platform, proposed Treasury buybacks of government bonds to curb long-term yields, similar to those recently carried out by the U.S. Treasury.

Gabrielli also criticised a Folha editorial published last week that called for urgent federal spending cuts to avert a fiscal crisis and lower interest rates. He said the editorial portrayed Brazil as being “on the brink of chaos.”

Neither Lula’s campaign nor the Treasury immediately responded to requests for comment.

Spending cuts argument

Adolfo Sachsida, a former Mines and Energy Minister who joined the economic team of Lula’s leading rival Flavio Bolsonaro last week, said spending cuts rather than market intervention were the only sustainable way to reduce rates.

In a post on X, Sachsida described Gabrielli’s proposal as an artificial and “mediocre” effort to suppress borrowing costs.

“Technically, this means injecting liquidity into the economy … and once that happens, inflation rises. When inflation rises, interest rates will have to rise as well,” Sachsida said.

Fiscal concerns

Brazil is paying about 7.5% in real interest rates on government bonds maturing in 2045, reflecting the premium investors demand to finance the country over the long term amid doubts about its ability to contain the rapid growth of mandatory spending.

Higher yields are increasing financing costs for the government and private sector, while fuelling concerns about Brazil’s fiscal outlook and rising debt burden.

Analysts remain sceptical that either candidate will be able to rein in public finances, although market reactions to opinion polls suggest investors favour Bolsonaro’s programme.