Market celebrates Central Bank independence in interest rate decision

Faria Lima, a well-known group of the largest companies in the country’s financial market – named after the concentration in the region of Avenida Faria Lima, in São Paulo – celebrated the decision of the Monetary Policy Committee (Copom) to maintain interest rates at the current level of 13.75%, which reaffirmed the independence of the Central Bank. The relief comes after intense pressure from the Lula government and supporters to force lower interest rates, with the right to demonstrations for the departure of the president of the Central Bank, Roberto Campos Neto.

Despite the fact that the high Selic rate is negative from the point of view of the profitability of companies in the financial market, which attract more capital to variable income in the face of low interest rates, the posture of the committee and President Roberto Campos Neto in maintaining it is seen as positive for preserving the principles of economic liberalisma school that basically defends the non-interference of the State in the economy and the self-regulation of the market and whose foundations have already proven efficient from the point of view of the balance of the economy throughout history.

“The high interest rate is bad for everyone, but forcing it down is worse”, says Renato Breia, founding partner of Nord Research. Several examples show that raising interest rates is detrimental to the financial market. When the Selic rose, the boom of new investors on the stock exchange ceased and the investment companies that had multiplied during the pandemic had to make massive layoffs. In addition, high Selic reduces the supply of credit and increases default, which also harms banks and brokerages. Despite these negative factors, forcibly reducing the Selic rate brings worse consequences.

In President Dilma Rousseff’s first term, with Alexandre Tombini at the head of the Central Bank, interest rates were lowered by force, which contributed to the economic crisis that later triggered the impeachment.

After the maneuver on the Selic, inflation ended the year 2015 at 10.67%, the highest rate since 2002. BC. It surprises a government that saw this going wrong betting on the same mistake“, says Breia. Now, the market’s expectation about the next directors of the Central Bank is great, considering that they will be appointed by President Lula and will give indications on how the government will conduct, in practice, the independence of the Bank Central.

diversion of attention

For Fábio Guarda, partner and manager of Galapagos Capital, the last Copom communiqué was even more incisive than expected by the market and showed that, regardless of the pressure from the Executive, the Central Bank remains firm in its willingness to keep interest rates high until the expectations anchor and get closer to the goal. Guarda also recalls that there are much more important factors for the Brazilian economy that need to be discussed and end up being left aside in the face of the discussion about the fall in the Selic rate.

“The interest is high due to structural issues of the Brazilian economy, not Roberto Campos Neto’s fault”, he says. “Everyone’s attention is on interest rates when this is not the structural problem of the Brazilian economy, but a very large government that spends poorly. To reduce interest rates, we should reduce the size of the state and increase efficiency, but this debate does not come to light”, criticizes.