Brazil Moves to Fight Inflation With Price and Wage Controls, New Currency

RIO DE JANEIRO — Brazil launched “a life-and-death” struggle against inflation Friday, freezing prices, imposing wage controls and creating a new currency to replace the battered cruzeiro.

The reforms, announced by President Jose Sarney, touch every aspect of economic life in this country of 135 million people, from wages and rent contracts to savings accounts and consumer credit.

The new currency, called the cruzado, will be worth 1,000 cruzeiros, the present monetary unit, whose value has been eroded by inflation. It will be launched with an official exchange rate of 13.8 cruzados to the U.S. dollar and will be worth about 7 cents.

Brazil also will abolish its practice of tying wages, mortgage rates and many other items to the consumer price index. That system, in effect for 21 years, has been blamed for fueling inflation rates that have soared past 200%.

Large Foreign Debt

Brazil, whose $100-billion foreign debt is the largest in the Third World, undertook the reforms in an effort to assure foreign bankers that the national economy will continue to grow without runaway inflation.

Sarney called for public support to prevent price speculation.

Hours later, police officers had to quell lunch-hour riots in the downtown business center of Rio de Janeiro as crowds attacked fast-food counters that tried to raise prices for sandwiches and soft drinks.

“From this day on, this is going to be a life-or-death fight to control inflation,” said Sarney, whose political future may depend on whether monetary reform succeeds.

For months, Sarney has been weighing the dangers of growing inflation, but he has been reluctant to take drastic measures that could produce a recession.

Economic Growth Pushed

Brazil has just emerged from 20 years of military rule. Sarney’s democratically elected civilian government has promoted economic growth and employment ahead of financial restraint. In November, Sarney faces national elections for a new congress and governors in all 23 Brazilian states.

The reforms reflect Sarney’s decision to put some austerity into the booming economy here and seek electoral support by rolling back the inflation that the president described as Brazil’s “public enemy No. 1.”

More important than the change in the currency is the underlying decision to abandon the Brazilian practice of indexing of prices to inflation. Since 1965, savings deposits, rental contracts, mortgage payments, consumer credit and government borrowing have been adjusted automatically to the rate of inflation.

When this policy, known as monetary correction, was introduced, inflation was being reduced, and the indexing encouraged savings and a capital market. But when inflation is rising, indexing accelerates price increases.

High Growth Rate

Since Sarney took office 11 months ago, Brazil’s economy has surged at an annual growth rate of more than 7%, one of the highest in the world. But growth, higher wages and increased consumer demand have fueled inflation.

The consumer price index rose 16% in January, followed by a 14.3% increase last month, and pushed Brazil’s inflation to an annual rate of 250%.

“If we continue to walk blindly in the direction of galloping inflation, the result will be recession, unemployment and loss of purchasing power,” said Finance Minister Dilson Funaro, who designed the package of reforms.

The measures announced by Sarney include a small increase in the national minimum wage, to about $60 a month, and an immediate 8% raise in wage contracts; once that raise is in effect, wages will be frozen for a year.

Readjustment Provision

If the consumer price index rises 20% in the coming year, wages will be automatically readjusted under the new wage decree, which also created for the first time in Brazil an unemployment compensation system.

Stock markets closed and a bank holiday was declared Friday as the capital markets and financial institutions studied the effects of the “de-indexation” of the economy. Banks and institutions holding about $30 billion in government securities, now convertible into cruzados without indexation, face losses.

Small savers holding federally guaranteed savings accounts will continue to be protected against inflation with quarterly adjustment of deposits to offset inflation. Rents and mortgage payments will be frozen for one year.