The new government had barely begun and the dispute between President Luiz Inácio Lula da Silva (PT) and the president of the Central Bank (BC), Roberto Campos Neto, took over the news. The heated debate between the two focuses on the economy’s basic interest rate, the Selic, which has repercussions for the entire economy and national politics.
Lula won last year’s presidential election promising to make the country’s economy grow again. To that end, he promised to resume public investments and reinforce income transfer programs for the poorest, such as Bolsa Família.
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Government spending tends to make the Gross Domestic Product (GDP) grow, exactly as Lula wants. But some economists see such spending as a driver of inflation, which hurts the poorest most.
The BC is the state body responsible for controlling inflation in the country and, for that, it uses, mainly, the basic interest rate.
The way in which the BC has used this rate, however, hinders economic growth, in Lula’s view. Therefore, the president has criticized the agency’s management, even the fact that it is currently independent of the federal government.
Selic, interest and inflation
The Selic is the benchmark interest rate for the national economy. Its level is defined by the BC’s Monetary Policy Committee (Copom) according to its assessment of the economy.
When the Copom sees inflation rising, it tends to increase the Selic rate. When it increases, so do the interest charged on loans, financing and installment payments. Entrepreneurs and consumers tend to postpone purchasing decisions. With less demand, prices are expected to go down or at least stop going up. In theory, inflation is controlled.
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From March 2021 to August 2022 –during the government of President Jair Bolsonaro (PL)–, the Copom increased the basic interest rate 11 times in a row due to inflation. The Selic, which was at 2% a year, reached 13.75% a year, and has remained so ever since.
High interest rates hinder the economy as a whole, by inhibiting investments and purchases, in addition to compromising the government budget since, the higher they are, the more the Union spends to pay off its debt. There is less money left to build schools, hospitals, generate jobs and income.
According to the BC itself, from August 2021 to July 2022, the government spent BRL 586 billion to pay interest on the national public debt. This corresponds to 6.31% GDP for the period.
It is also almost double the expense with interest accrued from August 2020 to July 2021. In that period, when the Selic was still between 2% per year and 4.25% per year, interest expense was R$ 323, 5 billion, which represented 3.94% of GDP.
Taking these data into consideration, the government defends the reduction of the Selic rate. The BC, however, does not show signs that it agrees with the president.
On the 1st, the Copom met for the first time during the Lula government. It could have lowered the interest rate. He decided to keep it, against Lula’s wishes.
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More than that, the Copom stated in a statement that “uncertainties in the fiscal scope” reinforced expectations about rising inflation. In other words: the BC said that the possibility of the government increasing its spending put pressure on the body to maintain the high Selic rate.
Lula did not like the Copom’s decision, much less the announcement about it. She gave an interview to TV network! the next day when he said that, for the country to grow again, interest rates need to fall. “Brazil needs to grow again. There is no reason for the interest rate to be at 13.75%,” he said.
Autonomy gets in the way
Lula also criticized the BC’s autonomy, granted from 2021. That year, then-president Bolsonaro signed a law that prevents the body’s president from being changed to each government, as had happened until then. That law now forces Lula to deal with Campos Neto, who was appointed by Bolsonaro himself.
Campos Neto has a term in BC until the end of 2024, that is, until half of Lula’s term. The president also declared in the interview with TV network! who may even forward a bill to Congress so that the BC’s autonomy is reviewed after that.
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“I will wait for this citizen (Campos Neto) to finish his mandate so that we can make an assessment of what the independent Central Bank meant”, said Lula. “Is this country working? Is this country growing? Are the people improving their lives? No. So, I want to know what independence was for.”
Goal under review
The same law that gave autonomy to the BC also determines that it acts as the guardian against inflation in the country. Thus, the body pursues an inflation target that is previously defined by the National Monetary Council (CMN).
The CMN is composed of the president of the BC and also by the ministers of Finance and Planning. Today, they are Fernando Haddad (PT) and Simone Tebet (MDB), respectively.
That same National Monetary Council (CNM), still in the Bolsonaro administration, established that inflation would have to be 3.25% in 2023, with a maximum of 4.75%. But the most current forecasts on the index indicate that it could exceed 5.5%.
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The forecast reinforces the BC’s discourse that the Selic needs to remain high. At the same time, it gives arguments for the new government, since it cannot intervene in the Central Bank, to change the inflation target – via the CMN – to make room for a cut in interest rates.
Dispute opens debate
Economists more aligned with the liberal agenda and the financial market disapprove of Lula’s criticism of the BC and defend the body’s autonomy. For them, the government should actually cut its spending so that inflation would fall and interest rates would be reduced.
“The BC is independent, period,” said Andrew Storfer, director of the Economics Nucleus of the National Association of Finance, Administration and Accounting Executives (Anefac). “The Executive had to stop throwing alcohol on the fire and give guidelines on austerity, to improve the business environment, the level of employment and the citizen’s income. Not criticizing interest rates or anything like that.”
Other economists, however, see the BC being managed based on the interests of the big banks, which have profited like never before due to high interest rates in Brazil. For them, the Lula government is being “blackmailed” to thwart their political project.
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“It is necessary to denounce the blackmail that the Central Bank is practicing to pressure the government to embrace an austerity policy, unnecessary and incompatible with the project of reconstruction of our society that President Lula presented to the people during the electoral campaign”, said the economist Daniel Conceição, professor at the Federal University of Rio de Janeiro (UFRJ).
In the same vein, Márcio Pochmann, economist and professor at the State University of Campinas (Unicamp), recalls that Brazil is the country with the highest real interest rate in the world (interest minus the percentage of inflation).
“Lula is correct in the statements he has made in relation to the position adopted by the Central Bank, which insists on maintaining a very high base interest rate, unparalleled in the world.”
According to Pochmann, the criticisms are correct mainly because Campos Neto’s management has not been able to fulfill its duty to bring inflation within the target established by the CNM, even with high interest rates.
Campos Neto has presided over the BC since the end of 2019, appointed by Bolsonaro. Despite the austere speech, under his management in 2021 and 2022, inflation broke the target.
This Tuesday, Campos Neto defended the BC’s autonomy at an event in Miami. According to him, it serves precisely to disconnect the body from political cycles, preventing a democratically elected president from intervening in the institution.
“I think (autonomy) is very important for different reasons. The main reason, in the case of BC autonomy, is to disconnect the monetary policy cycle from the political cycle, because they have different lenses and different interests,” he said.
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Lula, on the other hand, said that the BC, chaired by Campos Neto, is responsible for the interest. He also said that only the Federal Senate could remove him from office.
“I think that this citizen (Campos Neto) who was nominated by the Senate has the possibility to mature, to think and know how he is going to take care of this country because he has a lot of responsibility”, he said. “The BC is to blame for interest rates. Now it is the Senate that can change the president of the BC.”
Editing: Rodrigo Durão Coelho
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