An increase in the interest rate will not solve the inflation problem and will make it difficult to generate jobs

The increase in the cost of living is compromising the food security of Brazilians. With no option, more and more poor families go to the point of looking for animal bones and carcasses to eat.

During the pandemic, around 60 million people depended on donations to survive. Even those who did not lose their jobs or income in the period felt the increases in fuel, rent, energy and cooking gas in their pockets.

In this scenario, Jair Bolsonaro (no party) and Economy Minister Paulo Guedes have been betting on an increase in the basic interest rate, the Selic, to control inflation.

:: Central Bank raises interest rate to 7.75% per year ::

However, all you have to do is go to the supermarket or a department store to see that prices are still sky high.

Experts explain to Brazil in fact why this strategy has not been successful, and what to expect in the coming months.

“Monetary policy never has an immediate impact. It usually takes one or two quarters to be effective”, explains Matias Cardomingo, master in Economic Theory and researcher at the Center for Research in Macroeconomics of Inequalities (Made), University of São Paulo (USP).

“However, prices are not just the result of the interaction of the law of supply and demand: they are determinations of policy choices.”

Cardomingo cites, for example, the impact of fuel on the prices of any goods or services in Brazil.

“Petrobras’ policy of reducing the refining capacity and linking domestic prices to the international market is directly responsible for the increase in fuel prices”, emphasizes the economist.

:: Fuels and energy fuel inflation, and “previous” has highest for October since 1995 ::

The same would apply to the food sector. “It is possible to generate public food stocks for times of scarcity. For this, we have the National Supply Company (Conab), but there was a political choice not to invest”, he adds.

Last Wednesday, the Central Bank (BC) raised the basic interest rate by 1.5 percentage points, from 6.25% to 7.75% per year, the highest level since 2017.

The increase in the Selic rate would supposedly help reduce inflation, because higher interest rates make credit more expensive and discourage consumption.

“The BC’s monetary policy orientation, that inflation is contained via interest, assumes that there is pressure from demand on supply, raising the price”, analyzes Uallace Moreira, professor at the Faculty of Economics at the Federal University of Bahia (UFBA).

“The point is that the price in Brazil today is not a result of demand. The problem of inflation is the administered prices – for example, energy and fuel tariffs – and the lack of inputs in the international market, which is a problem from the perspective of supply.”

Another argument of the Central Bank is that the increase in the interest rate attracts speculative investments. With that, more dollars would enter the country, devaluing the US currency in Brazil and reducing prices.

“This generates a very high cost, because raising interest rates also means raising public spending, to increase the profitability of financial assets and feed short-term capital,” adds Moreira.

Brazil has a debt of approximately R$7.5 trillion. The expense, only with interest, is around 5%. Raising interest, therefore, means transferring more money to the financial sector, which holds government bonds.

According to a survey by the Independent Fiscal Institution (IFI), raising the Selic by 1% corresponds to R$ 53 billion more in interest payments.

Interest policy hinders economic recovery

The Brazilian economy shrank 0.1% in the second quarter. It was the third worst performance among the so-called G-20 countries.

One of the effects of the increase in the Selic rate is precisely the economic slowdown, which will make it difficult to generate jobs.

“When you increase interest, in addition to overloading public accounts and transferring income to the financial sector, the possibility of economic recovery is compromised. This is very serious”, emphasizes the UFBA professor.

“We have an unemployment rate of 13.2%, plus 4.9% who are not looking for a job due to lack of hope. So, the increase in interest rates makes credit more expensive, inhibits consumption and, therefore, makes economic recovery unfeasible, because 64% of our GDP comes from the domestic market”, he adds.

Matias Cardomingo emphasizes that the amount that will be passed on to the financial sector with the increase in the Selic rate, outside the “Expenditure Ceiling”, is higher than the estimated cost of Auxílio Brasil – a poverty reduction program that would replace Bolsa Família.

“We are going to have a fiscal stimulus movement, and a contractionary movement in monetary policy. It is similar to what we experienced between 2015 and 2016, and the balance of these policies will have a relevant impact on inequality”, concludes the researcher from USP.

Edition: Vivian Virissimo

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