Good and bad reasons for the fury against interest rates – 06/22/2023 – Vinicius Torres Freire

Discussing the level of the basic interest rate may be of interest. If it’s going to be half a percentage point higher or lower, within a quarter, in a volatile economy, with large variations, like the Brazilian one, it doesn’t seem very relevant or make much sense. The government’s furious reaction against the Central Bank’s decision is even less understandable, including now that of Fernando Haddad.

Imagine a situation in which the BC drops inflation in the range of 4.5% to 5%, which still seems to be the case for the IPCA variation at the end of 2023. That the 2024 inflation target would be close to that , at 4%, as people in government policy considered at the beginning of the year. What would become of the Selic, a very short-term rate, and the other basic rates in the economy, with a longer term? What about inflation?

We would have persistently higher interest rates throughout Luiz Inácio Lula da Silva’s term. It is a hypothesis, but also based on the fees that the owners of the money charged until March of this year.

That is: Selic just a little lower and at the highest period average; higher “along the curve” (on longer terms) rates; somewhat higher inflation; slightly more devalued dollar. This also means flatter wages (in real terms) and probably lower GDP growth.

It is also possible to imagine a situation, in the future, in which the present tightening of the Central Bank improves Lula’s economic prospects 3. That is, if the BC does not act foolishly from now on.

What does that mean? Lower inflation, with a faster and safer lowering of the Selic rate, can reduce public debt costs. Not only. Longer term rates have been falling, which influences the cost of investment money. They can fall further. The government is already paying less to finance its longer-term deficits. Yes, with the Selic high and so much debt being rolled over at that rate, the situation is worrisome. But, again, with lower inflation and a lower Selic rate throughout his term, it is possible that Lula 3’s life will become less difficult.

Yes, less difficult. Lula inherited a huge public debt, skeletons in the closet (such as the precatorios) and irresponsible tax waivers, in addition to chronic problems in the Brazilian economy and state. If you don’t stem the debt growth, we’re in trouble. If the inflation-and-then-Selic “combo” remains high, even worse for the debt.

This makes it even less understandable the reaction of people like Fernando Haddad —who is not like a deputy linked to the PT command, who has just asked for the head of Roberto Campos Neto (even if he succeeded, it would be of no use, for his purposes ).

The Minister of Finance said this Thursday that the Central Bank is “hiring a future problem”, such as “future inflation or an increase in the future tax burden”. Haddad seems to be based on the idea that the BC and its Selic will break the government due to an excess of medicine. Why don’t you consider the opposite hypothesis? Inflation and higher interest rates over three years, if the Central Bank had “let go”?

However, people from the government of which he is a part speak of “sabotage” by the BC and things like that. It is possible to say harsh things about Central Banks. “Sabotage” is just ignorance. Apart from the hypothesis of ignorant folly and conspiracy manias, it is difficult to understand this attitude, even politically.

Yes, BC is still sub judice. It depends on what you are going to do, especially from September onwards. Until then, there will be no relevant change, with the Selic stable or falling by alms of 0.25 points or 0.5 percentage points. Finally approving the so-called “fiscal framework”, charging more taxes to achieve a deficit limited to 0.5% of GDP, approving a good tax reform, that will make a difference.

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