High interest rates and lower inflows of foreign funds led to a ‘sharp’ economic slowdown in 2022, says Fazenda

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Resources from abroad have been reduced in 2022 amid the war in Ukraine and interest rates set by the Central Bank have risen to combat inflationary pressures. The Secretariat for Economic Policy of the Ministry of Finance assessed this Thursday (2) that the “sharp slowdown” in the pace of growth in 2022 reflects, above all, the “reduced liquidity in the external environment” and the “contraction cycle of monetary policy” , that is, the process of raising interest rates. In the last year, according to information released by the Brazilian Institute of Geography and Statistics (IBGE), Brazil’s Gross Domestic Product (GDP) grew by 2.9%, against a much larger expansion, of 5%, in 2021. the flow of funds from abroad reduced in amid the war in Ukraine and interest rates set by the Central Bank rose to combat inflationary pressures arising from the end of the pandemic and the conflict in Europe. The Selic rate started 2022 at 9.25% per annum and ended the year at 13.75% per annum — the highest level in over six years. This is a new reference from the economic team to the process of raising interest rates, conducted by the Central Bank to try to contain inflationary pressures. The autonomous BC, commanded by Roberto Campos Neto, appointed by former President Jair Bolsonaro, has already been the target of attacks by President Luiz Inácio Lula da Silva. This Wednesday (1), the Minister of Finance, Fernando Haddad, again criticized the level of the Brazilian interest rate and stated that this is the “main economic problem” of the country today. Despite this, he also stated that he is not putting pressure on the Central Bank to reduce the economy’s basic interest rate. According to the Secretariat for Economic Policy of the Ministry of Finance, the increase in interest rates added to the growing default made it difficult to take credit and productive investments, leading to the retraction of industrial activity and investments (gross formation of fixed capital) in 2022. “This scenario was partially offset by the service sector, stimulated by readjustments in the values ​​of the income transfer program, release of the FGTS and by the growth of the wage bill throughout the year. The growth of exports, reflecting mainly the increase in commodity prices , also collaborated positively,” he added. Outlook for 2023 Looking ahead, the Ministry of Finance assessed, however, that activity is expected to recover at the margin (in the most recent months). He mentioned the estimated growth in grain production this year, the positive dynamics of the labor market, the appreciation of the minimum wage (whose increase to R$ 1,320 in May has already been confirmed) and the increase in the Income Tax exemption range. On the other hand, he mentioned again, as a “negative vector” of activity, the “significantly contractionary monetary policy field”, that is, the process of raising the basic interest rate by the Central Bank. “As a consequence of high interest rates, an upward trend is observed for spreads and for the cost of credit [juros bancários]in addition to a sharp slowdown in free credit concessions”, he evaluated. The Secretariat for Economic Policy of the Ministry of Finance also cited the fall in confidence in industry in February, reflecting both the current situation and expectations, as well as the decline in level of use of the industrial park.”The external sector may be another deceleration vector, depending on the pace of cooling of global activity due to the cycle of monetary tightening in the central economies, with emphasis on the USA and Europe”, he concluded.

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