Fiscal rule proposed by the government will not be enough to lower interest rates

The proposed fiscal framework announced by the government should not be enough, by itself, to reduce the basic interest rate (Selic), currently at 13.75% per year. Other factors that will weigh in the coming months, according to analysts consulted by the People’s Gazetteare the development of the government’s attacks on the Central Bank and the discussion of inflation targets, issues that have influenced inflation expectations for this and the coming years.

Part of the market welcomed the plan presented by the Minister of Finance, Fernando Haddad, in particular the goal of zeroing the primary deficit in 2024 and obtaining surpluses in the following years. However, skepticism prevails among many economists regarding the viability of this objective.

If the plan is not understood to be efficient in improving the public accounts scenario, it will have little or no effect on inflation expectations – and such expectations are among the main factors that influence the decision on the interest rate, according to the Bank’s announcements. Central.

The main criticisms are directed at the forecast of real growth in expenditure every year – even in the event of a drop in revenues – and the strong increase in revenue needed to meet the targets. Haddad promises to present a package soon to raise revenues by up to R$150 billion.

“Adjustments in public accounts will be necessary, via tax increases”, says the chief economist at MB Associados, Sergio Vale. It is the same assessment made by Affonso Celso Pastore, former president of BC.

Infinity Asset’s chief economist, Jason Vieira, questions the revenue projections of the measures being prepared by the Treasury. For the taxation of betting sites, for example, the initial estimate was around BRL 6 billion per year; suddenly, the projection rose to R$ 12 billion to 15 billion. There are also doubts about the taxation of imported consumer goods, with revenue estimated at R$ 8 billion, among other initiatives. Another problem pointed out by Vieira is that the government assumes that taxation will be accepted without reaction from the affected agents.

An assessment made by XP Investimentos shows that, with economic growth close to 1.8% per year in the medium term, the proposed fiscal rule is unable to deliver the primary results and guarantee the stabilization of the public debt, even with an increase in revenues of one percentage point of GDP.

“This is only possible if we consider both the official parameters, which we understand to be more optimistic in terms of potential growth, and measures that permanently increase revenues from 2023 above 1% of GDP”, says economist Tiago Sbardelotto, from XP.

Genial Investimentos follows the same line. According to an assessment by the brokerage firm’s macroeconomics team, for the public debt to stabilize with this scenario, a primary surplus of around 2% is needed – well above the most optimistic projections by the market and the government itself.

“The debt/GDP ratio would only stabilize with a decrease in interest rates. That is, so far, there is a lack of detail that generates certain inconsistencies in the new tax rule”, says the report.

For Vieira, “the government seems steeped in optimism somewhat above the reality of the facts to present its plans, especially when, supposedly, it does not include tax increases.”

Tax rule subject to congressional approval

Another question mark is in the Legislature, highlights Infinity’s chief economist. “Everything is being presented as if Congress were mostly favorable to the government and there were no discussions and dissent on issues, especially those related to spending”, he says.

Vale, from MB Associados, points out that, politically, there are good signs in the air, such as the good receptivity on the part of the opposition, arousing few more scathing criticisms. One exception was the president of the Novo party, Eduardo Ribeiro, who said that the new fiscal policy fails to solve the problem and is not in line with the country’s reality.

Vale believes that the new fiscal rules will be approved in the first half of the year, after a quick discussion in Congress, which could lead to the Monetary Policy Committee (Copom) already signaling the beginning of the cycle of falling interest rates. “If everything goes well with the approval of the fiscal framework and the acceleration in the processing of the tax reform, there is room for the Selic to fall already in the third quarter”, he assesses.

Inflation weighs heavily on interest rate decisions

The chief economist at the TC analysis house, Marianna Costa, points out that the new fiscal rules are insufficient, by themselves, to lower the Selic rate. There must also be a deceleration of inflation.

“The process of falling prices will come from lower pressures from demand and supply. The slowdown in activity and the lower supply of credit are factors that weigh more on the dynamics of inflation in a shorter term, ”he says.

According to Professor Margarida Gutierrez, from the Institute of Graduate Studies and Research in Business Administration at the Federal University of Rio de Janeiro (Coppead/UFRJ), the balance of risks for inflation, at the moment, rules out the possibility of a reduction in the Selic rate in very short term.

Inflation in 12 months, which in February reached 5.6%, according to the Brazilian Institute of Geography and Statistics (IBGE), should continue to fall until the end of the first semester. However, reality changes in the second half, with the year ending with inflation close to 6%, for two reasons:

• in July, August and September of last year there was deflation, offering a negative contribution to the IPCA. During the second semester, this influence disappears;
• the job market remains relatively heated, even with the increase in the unemployment rate. The tendency, according to analysts, is for the mass of income to continue growing, helped by government transfers, which maintains pressure on inflation, especially in services.

There are factors, however, that may contribute to a drop in inflation. This is the case of the reduction in the price of some commodities and the slowdown in credit and economic activity. “But, in a balance of forces, upside risks still predominate”, says the Coppead/UFRJ professor.

Central Bank watches future inflation more

Another factor to pay attention to, in relation to the drop in the Selic rate, is the weakening of inflation expectations. That is, they are getting further away from the center of the targets, which are 3.25% for 2023 and 3% for 2024 and 2025. All of them have a tolerance interval of 1.5 percentage points above or below.

Since December, the median projections for the 2023 IPCA increased from 5.36% to 5.96%; those of 2024, from 3.50% to 4.13%; and those for 2025, from 3.02% to 4%, according to the BC bulletin Focus.

This is an issue that the Central Bank is closely monitoring. “We observed a weakening of inflation expectations for longer terms. This is a development that we are following closely, but we are going to observe at each Copom the whole set of information available to evaluate”, said the director of international affairs at the BC, Fernanda Guardado, to the newspaper “Valor”.

According to her, it will be possible to think about cuts in interest rates when there is greater certainty of the process of convergence of inflation to the targets. The last expectation of banks, brokerages and consultancies released by the Focus bulletin, from the Central Bank, points to an interest rate of 12.75% at the end of the year, which would signal a drop of one percentage point in 2023.

Lula’s attack on the Central Bank fuels uncertainty and worsens expectations

The director of macroeconomics and partner at Tendências Consultoria, Alessandra Ribeiro, says that it is necessary to reduce uncertainties about the Brazilian economy so that the fall in interest rates is also feasible. “With less uncertainty, the exchange rate appreciates and makes room for inflation to fall,” she explains.

One of the factors that also contribute to the expansion of uncertainties and noise about the Brazilian economy is the criticism of politicians and authorities, led by President Luiz Inácio Lula da Silva (PT), to the BC’s interest rate policy.

The director of Tendências claims that the government would provide fundamental help if it stopped “hitting” the Central Bank: “This is a disservice and contributes to raising uncertainties. It is necessary to let the State institutions work”.

Economic uncertainties reached, in March, the highest level since July 2022, points out an indicator from the Brazilian Institute of Economics of the Getúlio Vargas Foundation (Ibre / FGV). According to economist Anna Carolina Gouveia, one of the factors that weighed was the intensification of the debate between the government and BC.

However, there are no signs of a break from Lula’s attacks on the Central Bank. In a video sent on Friday (3) to members of the Council for Sustainable Economic and Social Development, the “Conselhão”, the PT member stated that the country cannot continue with a “policy of scorching interest rates”.

Maintaining inflation targets can help cut interest rates

Another sign of uncertainty that still prevails is in relation to inflation targets, also criticized by Lula. In June, the finance ministers, Fernando Haddad; of Planning, Simone Tebet, and the president of the Central Bank, Roberto Campos Neto, meet at the National Monetary Council (CMN), to define the inflation target for 2026.

“In order to anchor expectations, in addition to the fiscal framework, there must be no change in inflation targets”, says the chief economist at Daycoval Asset Management, Rafael Cardoso.

An eventual increase in the inflation target could create a more complicated scenario for a reduction in the Selic rate. “It could worsen expectations and leave the BC with no space to promote the cut, because of inflationary pressures”, emphasizes the director of Tendências.

In an interview with GloboNews on Monday (3), Haddad said that he had never discussed changes in the inflation target and highlighted that the debate should not have taken place in this scenario. The ideal, according to the minister, would initially be to focus on fiscal policy, and then discuss issues related to monetary policy, that is, interest rates.

However, hours later Haddad discussed the issue of targets with the president of the Central Bank, as the minister himself reported on Tuesday (4th) in a conversation with investors.

“There is a debate whether meta-change anchors or unanchors [expectativas de inflação e juros]. I also discussed this subject with Roberto Campos Neto here to assess his opinion regarding this debate, not his opinion on the target, because we are not discussing it at this moment, we have not discussed this subject throughout this year”, said Haddad at an event of Bradesco BBI, as reported by “Folha de S.Paulo”.

According to the minister, other issues will be discussed when the CMN sets inflation targets for the coming years. One of them is the eventual implementation of a continuous inflation target, adopted in some countries, instead of the target for the calendar year, as is currently the case in Brazil.