Interest rates are an aberration, but it used to be worse – 06/24/2023 – Vinicius Torres Freire

It is easy to understand the almost general fury against the horrific high of interest rates, now directly associated with Central Bank policy. However, rates on major bank credit lines were once at a higher level than they are in the current squeeze. It is impossible to measure the level of fury against interest from other years. What might have changed?

The portion of monthly income devoted to loan payments is at the highest level since the Central Bank published this indicator, in March 2005. Useful as it may be, this number has its shortcomings. It is an aggregate or average: roughly speaking, how much household income across the country is devoted to interest and principal payments on loans, per month. It’s easy to assume that there must be people with less debt and more income and vice versa.

Furthermore, there was a sharp drop in interest rates during the Covid collapse, a trend that came from the post-Great Recession years, GDPinho and falling inflation. Compared to this valley, the recent rise causes more revolt; there was also a wave of indebtedness.

The bigger fact is that median income from work is only 5% higher than it was in 2012. Since then, lives, jobs and businesses have been ruined by two recessionary meltdowns and the almost zero growth of 2017-19.

Obviously, this does not mean that the level of interest rates in Brazil, a worldwide aberration, is a minor reason for the outcry directed against BC, rentiers, banks or whatever. Does it mean that:

1) we have a chronic credit problem; 2) bank fees were once higher; 3) even if the Selic rate falls, certain rates will remain high for some time, for economic and structural reasons.

The average non-vehicle finance rate is at its highest level since 2011 (whenever comparable data are available) with the exception of mid-June 2015 to mid-2018—these were the years of the Great Recession and its aftermath, when almost all rates were 12-year highs.

On the other hand, the average mortgage rate, despite the recent bad rise, is lower than in the period from 2011 to 2017. But this rate has dropped to a lower level due to regulatory and competition changes, among others.

The average cost of financing a vehicle has risen sharply since mid-2021 (from around 16% per year to 22%), but is at the level recorded in 2011. Etc.

The average rate for installment credit cards (201% per year) is at a height not seen since 2011. That for revolving cards is still lower than the 498% per year peak of 2016. But it’s a sinister joke to say “lower” when the current rate is 448% per annum. It’s deadly all the same.

The revolving card rates will barely move with a lower Selic or painted purple. It is bad credit, which needs to be reviewed and in which default is more than 50%.

Yes, the cost of credit varies with the economy’s basic rates, although their levels are not determined by the Selic. Families’ credit situation, evolution of labor income, guarantees, regulatory improvements, competition, GDP, all of this will influence the destination of interest.

For companies that raise money in the capital market, rates start to deteriorate. Longer interest rates fall, despite the immovable Selic, due to improvements in macroeconomic expectations.

Yes, if the Selic drops and the public debt is under control, with less economic instability, the so-called long interest rates will fall even further.

However, it is not enough for the BC to turn a crank for the credit to be less aberrant or for the pain of the squeeze to decrease a lot. We’ve been in socioeconomic collapse for a long time, even by our poor standards.

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