The new government has just begun, and the dispute between President Luiz Inácio Lula da Silva (Workers’ Party) and Brazil’s central bank (CB) chief Roberto Campos Neto has flooded the media. The intense debate between the two men focuses on the country’s benchmark interest rate, known as Selic, which has repercussions on the economy and national politics.
Lula won the 2022 presidential election promising to make the country’s economy grow again. To do so, he promised to resume public investments and strengthen income transfer programs aimed at the poorest population, such as Bolsa Família (Family Grant).
Government expenses tend to increase Gross Domestic Product (GDP), which is exactly what Lula expects. But some economists see these expenses as a factor that causes inflation, which harms mainly the poorest people.
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The CB is the government agency in charge of controlling inflation in the country and, for this purpose, it mainly uses the base interest rate.
The way in which the CB has been using this rate, however, hinders economic growth, in Lula's opinion. For this reason, the president has been criticizing the agency's management, including the fact that it is currently independent from the federal government.
Selic, interest rates and inflation
Selic is Brazil’s benchmark interest rate. Its level is defined by the BC's Monetary Policy Committee (Copom, in Portuguese) according to its assessment of the economy.
When Copom identifies a rising trend in inflation, the committee increases Selic. When Selic increases, so do interest charges on loans, financing and installment plans. Consumers, businessmen and businesswomen tend to postpone purchase decisions. Having lower demand, it’s expected that prices reduce too or, at least, stop rising. In principle, inflation is thus controlled.
From March 2021 to August 2022 (during the Bolsonaro government), Copom raised the basic interest rate 11 times in a row due to inflation. After reaching 2 percent a year, Selic jumped to 13.75 percent a year and has maintained this rate ever since.
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High interest rates hamper the economy as a whole since they decrease investments and purchases. In addition, they compromise the government budget because the higher they are, the more the State spends to pay its debt. There is less money to build schools and hospitals and generate jobs and income.
According to CB, from August 2021 to July 2022, the government spent 586 billion reais (about 111,9 billion US dollars) to pay interest on the national public debt. It corresponds to 6.31 percent of GDP for this period.
It is also almost two times the expenses with accumulated interest from August 2020 to July 2021. In that period, when SELIC was still between 2 percent a year and 4.25 percent a year, the costs with interest rates were 323,5 billion reais (61,7 billion US dollars) – 3.94 percent of GDP.
Public arguments
Considering the abovementioned figures, the federal government advocates for reducing Selic. Despite this, BC does not show any signs of agreeing with the president.
On February 1st, Copom met for the first time during the current Lula administration. The committee could have reduced the interest rate but decided to maintain it, contradicting Lula.
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More than that, Copom said in a report that “fiscal uncertainties” bolster expectations of high inflation. In other words, the CB said that the possibility of the government increasing its expenses pressures the bank to keep Selic high.
Lula disapproved of Copom's decision and the public report about it. He gave an interview to the Brazilian TV channel RedeTV! the next day. 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 13.75 percent,” Lula said.
Autonomy is a problem
Lula also criticized BC’s autonomy, granted in 2021. That year, then-president Bolsonaro enacted a law preventing the chief of the bank from being replaced at each mandate, as happened until then. That law now forces Lula to deal with Campos Neto, who was appointed by Bolsonaro himself.
Campos Neto will remain BC’s chief until the end of 2024, that is, until halfway through Lula's term. During his interview with RedeTV!, the president stated that he may hand in to Congress a bill to reassess BC’s autonomy after Campos Neto's term.
“I'm gonna wait [for Campos Neto to finish his term as chief] and then we'll see what independence means to the Central Bank," he said. "Is this country heading in the right direction? Is it growing? Are people having a better life? No. Thus, I want to know what [BC’s] independence was for.
Inflation goal under review
The same law that gave autonomy to the central bank also stipulates that it acts as a guardian against inflation in the country. Thus, the institution pursues an inflation level that was previously defined by the National Monetary Council (CMN, in Portuguese).
CMN is composed of BC’s chief and the ministers of Finance and Planning, currently Fernando Haddad (Workers’ Party) and Simone Tebet (Brazilian Democratic Movement), respectively.
During the Bolsonaro administration, the council established that inflation in 2023 would be 3.25 percent, reaching a maximum of 4.75 percent. But the most recent forecasts on the index indicate it could surpass 5.5 percent.
The estimate reinforces BC's statement that Selic needs to remain high. At the same time, it gives arguments for the new government – since it cannot interfere in the Central Bank decisions – to change the inflation targeting via the CMN to make room for a cut in interest rates.
Dispute on debate
The economists more prone to economic liberalism and the financial market disapproved of Lula's criticism of BC and advocated for the bank’s autonomy. To them, the government should, actually, reduce its expenses so that inflation falls and interest rates are reduced.
“The central bank is independent, period,” said Andrew Storfer, director of the Economics Nucleus of the National Association of Finance, Administration and Accounting Executives (Anefac, in Portuguese). “The executive [power] should stop adding fuel to the fire. It should provide guidelines about austerity in order to improve the business environment, job level and citizens' income. [It] should not criticize interest rates or anything else like that."
Other economists, however, see the central bank being managed based on the interests of big banks, which have profited like never before due to the high interest rates in Brazil. For them, the Lula government is being "blackmailed" to thwart its own political project.
“It is necessary to denounce the blackmail that the central bank is practising to pressure the government to embrace an unnecessary austerity policy that is incompatible with the project for the reconstruction of our society presented by President Lula during the election campaign,” said economist Daniel Conceição, professor at the Federal University of Rio de Janeiro.
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Similarly, economist and professor (Unicamp) Márcio Pochmann recalls that Brazil has the highest world real interest rate (interest rate less the percentage of inflation).
“Lula is right in his statements about the BC’s stance. "The bank insists on maintaining a very high basic interest rate level, which is unparalleled worldwide".
According to Pochmann, the criticism is justified, especially because Campos Neto's management has not been able to fulfill its duty to bring inflation within the level established by the CNM, even with high interest rates.
Since the end of 2019, Campos Neto has led CB. He was appointed by Bolsonaro. Despite his praise for austerity, under his management in 2021 and 2022, inflation surpassed the defined level.
Growing tension
This Tuesday, Campos Neto defended BC’s autonomy in an address at an event in Miami. According to him, autonomy serves precisely to disconnect the bank from political cycles, preventing a democratically elected president from intervening in the institution.
“I think [autonomy] is very critical for different reasons. The main one is to disconnect the monetary policy cycle from the political cycle because they have different lenses and interests,” he said.
Lula said that it’s BC’s responsibility to decide on interest rates. He also said that the Senate is the only one that could remove Campos Neto from office.
“I think this guy [Campos Neto] who was appointed by the Senate has the opportunity to think it over and figure out what he'll do for the country. He has a lot of responsibility,” Lula said. “That’s BC to blame for the [high] interest rates. The Senate can change the president of the central bank.”
Edited by: Flávia Chacon e Rodrigo Durão Coelho
