Government is to blame for high Selic rate, says Ipea researcher – 05/27/2023 – Panel SA

The Institute for Applied Economic Research (Ipea) published two books in which it shows the weight of earmarked (subsidized) credit in the Selic. One of the authors, researcher Ricardo Bacelette, 42, says that this modality represents half of the total number of loans in the country and forces the Central Bank to pay interest.

In an interview, he explains that this type of credit ends up disturbing the BC’s monetary policy because, as they have interest below the Selic, they force the regulator to raise the basic rate even more to contain inflation.

Is there any reason for the government’s pressure for the BC to reduce the Selic rate? [O economista John Maynard] Keynes taught that demand causes inflation. But how to explain high inflation in countries in deceleration or recession? If the Selic is excessive —and I don’t rule out that hypothesis—, inflation would be below the target and not at the ceiling. If with the rate at this high level we have inflation at the top of the target in the last six months, how would inflation be if the Selic were lower? Theories and beliefs are being confronted by reality.

Is the government then to blame? One of the diagnoses we made at Ipea is that the large volume of earmarked credit puts pressure on the Selic. These operations that rely on Treasury capitalization, equalization or other forms of subsidy, affect the fiscal [balanço entre gastos e receitas] and increase the need for the state to finance itself. The government needs to offer more premium [juros] for those who buy their papers. As around half of the credit market is targeted —that is, it uses rates lower than the Selic—, monetary policy loses power.

Like this? As earmarked credit escapes the Selic, the BC needs to raise the rate even further to maintain its effectiveness. The power of monetary policy over demand dropped from 94% between 2006 and 2008 to approximately 85% between 2013-2015. In a situation like this, it is necessary to keep the Selic at 10% per year, for example, to have the same effect against inflation of a rate of 8.5%.

The government says that earmarked credit does not carry that much weight. In the past, earmarked credit expanded via the Treasury. Until 2009, the BNDES sought funding from the Fundo de Amparo ao Trabalhador (FAT), which was remunerated by the TJLP, the same rate offered to the borrower by the BNDES, which still charged a spread.
However, Treasury resources had the financial cost of the Selic, higher than the TJLP. The difference between the rate at which the BNDES remunerated the Union’s capital (TJLP) and the rate at which the Union raised funds (Selic) was an implicit subsidy paid by the Union. This dynamic is still maintained today via TLP and Selic.

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Training: International Relations by UnB
Career: He worked in consultancies and international organizations and was an advisor at the Ministry of Industry and Commerce (2006-2007); in 2011, he became a researcher at Ipea. In 2019, he was assigned to the Ministry of Economy as an advisor to Sepec

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