By Jose de Castro

SAO PAULO (Reuters – Brazilian stocks plunged to an 11-month high on Thursday, but interest rates futures jumped higher and the currency weakened as a result of fears the government might lower a constitutional spending limit.

Late Wednesday, Economy Minister Paulo Guedes stated that the government might try to lift 30 billion Brazilian Real ($5.3 billion) spending from its fiscal limit to increase welfare spending. This was at President Jair Bolsonaro’s request.

Bolsonaro’s popularity has fallen and news headlines have focused on a Senate inquiry that called for criminal charges for Bolsonaro’s handling of the pandemic. President Obama is pushing for greater government spending to get ahead of next years’ election.

In public comments on Thursday, he pledged to provide truckers with relief from rising diesel prices. He did not specify details. Although he reiterated his pledge to double the payments from Brazil’s main welfare program while remaining fiscally responsible, markets dismissed him.

Brazil’s benchmark stock market index fell by around 4% on Thursday, to its lowest level since November. For the first time since April, the real fell 2% to a level near 5.7 against the U.S. Dollar.

The futures market for interest rates indicated that they would bet on more aggressive central bank increases to control inflation. Inflation has already been in the double digits for 12 months.

Analysts at JPMorgan (NYSE) have changed their forecasts for upcoming monetary policies meetings. They now predict that the central bank will raise rates by 125 base points next week, and then again in December. This is instead of continuing 100-basis point increases.

Their proposal to exempt welfare spending more than the spending limit “is already jeopardizing credibility of fiscal sustainability”, they said. They also wrote that policymakers could be even more aggressive following a 150-basis point hike next week.

Analysts at JPMorgan warned that fresh stimulus could “backfire” and force the central bank’s financial institutions to tighten their finances. This would threaten a prediction for 0.9% growth next year.

($1 = 5.6870 reais)