Interest rates could drop in early August, according to a note disclosed by the Monetary Policy Committee (Copom) on Tuesday (27/06). However, this will depend on the continuity of the fall in inflation, and its impact on market expectations for the IPCA. The information was released during Copom’s last meeting, held last week, when the Selic rate was kept stable at 13.75% per year – the highest level in six and a half years. The statement has been made amid strong government pressure for a fall in the country’s basic interest rate in order to help the central authorities deliver their promise of stimulating the economy, particularly industry.
This Content Is Only For Subscribers
To unlock this content, subscribe to MOVI NEWS.
Pressure
On Thursday (29/06), during an interview, President Luiz Inácio Lula da Silva (PT) again criticized the interest rate set by Copom. Lula said that the institution has a “citizen who doesn’t understand anything about the people”. It is believed that the “man” would be Central Bank President Roberto Campos Neto.
Ministers Follow Lula
Agrarian Development Minister Paulo Teixeira spoke about the Copom statement published on Tuesday (27). Teixeira said that “reducing interest rates today is essential”, and that “it is past time”. His colleague, Agriculture Minister Carlos Fávaro questioned about maintaining the basic interest rate at 13.75% per year, said that the Central Bank needs to decide whether Brazil will grow.
Change in the Inflation Target and More Criticisms
On Thursday (29/06), Finance Minister Fernando Haddad again criticized the basic interest rate. He said that the Central Bank estimates inflation at 3.1% and that that “robust cuts” in interest rates can be implemented from August without risk. The declaration was made on the same day that he met with Planning Minister Simone Tebet (MDB) and the Central Bank President.
The three are part of the National Monetary Council (CMN), and they met due to a new measure that the Central Bank will adopt, the continuous inflation target. The decision was taken by the government and communicated at Thursday’s meeting.
Currently, the inflation target works with a closed period: from January to December of a given year. Thus, the objective is that the inflation measured in December, accumulated since the previous January, is within the target. In the continuous model it is different. Inflation has to be on target over a period, regardless of the closing date. In the continuous target, any extraordinary spikes in inflation, caused by temporary factors, can be absorbed in subsequent months. Thus, interest rates would not need to be raised immediately.
After the meeting, Tebet also criticized the basic interest rate by saying that there are no reasons in the Brazilian economy for the current interest rate to be maintained.
Invitation for the Senate
The Economic Affairs Commission (CAE) of the Senate approved an invitation for Campos Neto to provide explanations, after one of the requests was presented by the leader of the government in Congress, Senator Randolfe Rodrigues (Rede-AP). The Senate has been encouraged by President Luiz Inácio Lula da Silva (PT) to question the monetary authority amid fears that the Selic level (basic interest rate) will stifle economic activity.
Our Analysis:
Apart from strictly economic aspects, if the pressure work really has effect over Copom’s decisions, and the next meeting results in a decrease of interest rates, this represents a political victory for Lula’s government – even though a late one – amid several defeats, thus an important feat for the government’s stability. However, considering the date of the next meeting, it is unclear if a slow pace change (0.25%), which is expected, will have any significant effect on the the economic results for this year.
