Brazil currently has the highest real basic interest rate on the planet, according to a survey carried out by the investment manager Infinity Asset Management in 156 countries. The difference between the so-called Brazilian Selic rate –13.75% per year– and the official inflation accumulated in 12 months in the country –5.77% is almost 8 percentage points.
In Mexico, the country with the second highest real interest rate, the difference is just over 5 percentage points. In Chile, the third, it does not reach 5.
Such a difference came to be criticized by President Luiz Inácio Lula da Silva (PT) in the early days of his government. According to him, this is a “shame” and inhibits the resumption of growth in the country – one of his main campaign promises.
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Selic has an almost direct influence on the lives of many Brazilians, from the poorest to the richest. This is because it works as a kind of minimum interest rate for the economy. Affects purchasing and investment decisions. It impacts on job creation and even inequality.
For an ordinary citizen, Selic’s most direct impact on his life is visible in his bank account. Last year, 77.9% of families were indebted, according to the National Confederation of Commerce (CNC) – it is the highest percentage ever recorded. And this has to do with the basic interest rate.
The Selic works as a reference rate for everything that involves credit in the economy. It is the rate at which the government borrows from investors to fund its operation. This operation is considered the safest available on the market since the chance of the government not paying its creditors is almost zero.
If this is the safest operation, your interest rates tend to be the lowest. Any other loan to citizens or companies has higher interest rates as they involve higher risks.
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According to the Interest Survey by the National Association of Executives (Anefac), in January, individuals paid an average of 124% interest per year on credit operations. As for legal entities, 61% per year.
This rate is very high, according to economist Miguel de Oliveira, executive director of Anefac. It reached such a level last year, in part, due to the increase in the Selic rate.
In January 2021, Selic was at 2% per annum. In that month, the average interest charged to individuals was 92% per annum; of legal entities, 41% per year.
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For a family that had credit card or overdraft debts, for example, high interest rates increased that debt even more. It is not by chance, therefore, that the CNC also indicates that the country has a record percentage of defaulting families (28.9%) and families who say they are unable to pay their debts (10.7%).
“With the increase in the volume of indebtedness in the context of inflation and high interest rates, the year 2022 marked the realization of default as a social problem”, declared the CNC.
Effects on economy
With more families in debt, there is a lack of money for consumption. Without consumption, there is no production; companies lay off; circulating income falls; the economy slips.
This is a generalized effect of the Selic on the business environment in the country, according to Fausto Augusto Junior, economist and technical director of the Inter-union Department of Statistics and Socioeconomic Studies (Dieese). This effect has to do with the criticism that Lula has made of Roberto Campos Neto’s management at the Central Bank.
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Augusto Junior also explained that the high Selic affects investment decisions. First, because entrepreneurs do not want to invest if there is no expectation of return, considering the conditions of the population. Then, because it ends up being more worthwhile leaving the money in the bank, yielding based on the Selic rate, than investing it in the business.
“The entrepreneur has a factory there and money stored in the financial market, remunerated by the interest rate. He decides to buy a machine. But then he does a simple calculation: ‘how much profit will the machine bring me? at what risk?’. The money stopped in the bank already earns 13% a year”, he exemplified. “You have money saved and you are thinking about buying an apartment to rent it out. Depending on the rate of return on the investment you have in the bank, it is better to leave it there.”
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According to Augusto Junior, the high Selic contributes to less money circulating in the real world and more money in banks, in the financial market. This obviously favors banks, which recorded record profits in 2021, when Selic started to rise.
Part of these profits is also driven by the fact that banks are the largest holders of Brazilian public debt securities, which is corrected by the basic interest rate. So, in addition to banks having more money in their cash because customers decide to invest it there and not in the real market, they earn more because the government pays them more when the Selic rate rises.
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According to the Central Bank, from August 2021 to July 2022, the government spent BRL 586 billion to pay interest on the debt. Between August 2020 and July 2021, when the Selic rate was between 2% and 4.25% per year, spending was BRL 323.5 billion.
Economist André Roncaglia, a professor at the Federal University of São Paulo (Unifesp), said that, in theory, banks would also be harmed by the increase in the Selic rate in their operation, since they raise money paying higher interest rates and tend to lend less because there is less people buying cars, houses, machines, etc. Other than that, they still have to live with greater losses due to default.
Roncaglia pointed out, however, that the banking market in Brazil is extremely concentrated, with no competition. This allows banks to “calibrate” their rates based on all these factors and continue earning even in the most adverse scenario to capture and lend money to customers.
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“In general, banks profit a lot in all situations: they profit on the rise and they profit on the fall,” he said. “He will always try, as much as possible, to defend his profit margin and pass that on to the customer, but also by doing this he can increase the default rate. It is the balance here that the bank has to manage to remain viable.”
Roncaglia points out that this quest to maintain profit even in cases of high interest rates is easier in Brazil precisely because of the lack of competition. As Anefac’s research has shown, banks charge much higher interest rates than the Selic. This happens because there are few institutions competing in the credit market. There are basically five banks: Caixa, Banco do Brasil, Itaú, Bradesco and Santander.
Finally, Selic also impacts government accounts. If the Union pays more than R$ 500 billion in debt interest, that means R$ 500 billion less for the construction of schools, hospitals, Bolsa Família, etc.
This government spending is also an important inducer of economic growth in the country, as it generates jobs and income, which end up fostering consumption and production. Being, in a way, distributed among the population.
Spending on interest benefits a very small portion of society, as Roncaglia wrote in an article published in Folha de S.Paulo in January. In the article, he says that this small part is pressing for high interest rates since it benefits from it.
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According to Augusto Junior, from Dieese, the pressure for high interest rates happens through exaggerated charges for controlling inflation, for example. Discourses of this type generate expectations of price increases, cause the Central Bank to increase interest rates based on these expectations and the economy to remain stagnant.
“The idea is being thrown around in society that the interest rate has to be high because the fiscal risk is high. A self-fulfilling prophecy is being created”, said Augusto Junior. “If you say all the time that inflation is high, those who have doubts mark up the price. The government spends money on interest and the more it spends money on interest, the greater the fiscal problem.”
Editing: Rodrigo Durão Coelho
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