(Bloomberg) -- Brazilian markets sank after President Luiz Inacio Lula da Silva made it clear he’s not considering spending cuts to address growing fiscal concerns, just as his government struggles to get proposals to boost public revenue through Congress.

“The increase in tax collection and the decline of interest rates will allow the reduction of the public deficit without compromising the capacity for public investment,” Lula said Wednesday at a Saudi Arabia investor forum in Rio de Janeiro.

Traders, who are increasingly skeptical about government plans to boost revenue and the central bank’s ability to cut interest rates, immediately reacted to his comments. The Brazilian real weakened more than 1.2% while the nation’s benchmark Ibovespa stock index fell as much as 1.5%.

Lula’s remarks on reducing the fiscal deficit by lowering interest rates were “too strong,” said Ilan Arbetman, equity analyst at Ativa Investimentos. “It is a huge inversion of values: rates are the medicine, not the poison”.

Late on Tuesday, the Senate shot down the government’s latest attempt to craft legislation to get Brazil’s fiscal deficit under control. The proposal had called for provisional curbs to the use of tax credits to offset exemptions from payroll levies. Finance Minister Fernando Haddad, who is leading negotiations with Congress, later said the government had no alternative to the plan.

Swap rates jumped more than 20 basis points across the curve. The short-end of Brazil’s swap curve no longer prices in cuts to the benchmark Selic rate, currently at 10.5%. Instead, traders price in almost 70 basis points in hikes by the end of the year.

“The flow of political news is gaining more and more weight in the market,” said Pedro Serra, head of equity research at Ativa Investimentos. “Under normal conditions, it shouldn’t impact prices. But today, that’s not the case.

--With assistance from Leda Alvim, Davison Santana and Bruna Lessa.

(Recasts lede, updates market movements and adds analysis and context throughout.)

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