Mr. BRIC: Fighting inflation must be a high priority for Brazil

Jim O’Neill, the prominent economist who coined the well-known acronym BRIC to refer to the biggest emerging markets, urges Brazil to fight inflation, while warning that the Federal Reserve should be cautious in its tightening.

With the Ukraine war spurring a rebound in oil prices, the former Goldman Sachs Group Inc. economist said fighting inflation should be a “high priority” for Brazil.

Given its history of rising consumer prices that ended in hyperinflation in 1990, failing to get them under control would be the biggest setback for the economy in years, he says.

“It is extremely important that Brazil does not allow significant inflation to reappear permanently” O’Neill said in a video interview on March 4. “The reason I even put it in the BRICs is because I thought Brazil was serious about trying to control inflation.”

Brazil’s central bank has implemented one of the most aggressive tightening cycles in the world, raising interest rates by 875 basis points in the past year. Although it is set to slow the pace and end the gains in the coming months, the rally in commodities is leading traders to question whether policymakers will stay the course.

Inflation stands at 10.4%, above the 3.5% target, and economists’ forecasts and break-even rates are on the rise.

In the United States, for its part, the central bank should be careful with rate increases, since financial conditions are already very tight due to the war in Ukraine, which sent risk premiums around the world skyrocketing.

O’Neill, who is currently chairman of Northern Gritstone, an investment firm founded by the universities of Leeds, Manchester and Sheffield, said the Fed probably has “very little confidence” on his next steps as the Ukraine war unfolds.

Bets in futures markets are pricing in about 140 basis points of tightening in the United States this year, starting with a quarter-point hike this month, which would mark the first rate hike since 2018.

“The tightening of financial conditions is so harsh that they should be careful with the degree of adjustment they pursue”, said the British economist.

Here are other highlights:

Russia

• “I was often led to believe that Putin was a brilliant strategist”. But after the start of this invasion, “the evidence suggests that it is not”
• It is very difficult for Putin and Russia to maintain allies given their economic weakness
• The freezing of central bank reserves is “a huge measure” and will have profound consequences for the world monetary order
• “The BRICs as a political club have never achieved anything. it is very disappointing”

Latin America

• Latin American economies are affected by the “curse of the raw materials”: they do well when their prices rise and crash when they fall
• Brazil would need reforms to boost investments not related to raw materials and increase domestic savings to break the cycle
• “The precedent is not good”, O’Neill said about the prospects for Argentina to stabilize its economy after the agreement with the IMF. “I’m not very hopeful that another IMF deal will solve the problems.”
• Even Chile, which until four years ago would have been perhaps the only positive example in Latin America, will face “huge problems” due to issues related to equality, said the economist
• “Why is it so difficult for Latin America to get out of this middle-income trap? It’s really extraordinary”

Elections in Brazil

• O’Neill said he will keep the “open mind” on the Brazilian economy if the leftist Luiz Inácio Lula da Silva returns to power in the presidential elections in October
• Lula, who was in power from 2003 to 2010, was a big positive surprise, as he took fighting inflation very seriously in his first term, even though he left the presidency with rising inflation and rising public spending. , what it was “most disappointing”