Financial market economists lowered this year’s inflation estimate and increased the Gross Domestic Product (GDP). However, despite these and other improvements announced lately, the tug of war between the government and the Brazilian Central Bank (BC) for the reduction of the country’s basic interest rate (Selic) continues. The Central Bank maintains the inflation rate at 13.75%, which represents the highest interest rate worldwide (6.82%). The decision hampers some of the government’s projects for the economy, such as stimulating the local industry.
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Inflation
On Monday (12/06), the Focus Bulletin, released by the BC, announced that a survey that heard more than 100 financial institutions last week about projections for the economy verified that the inflation estimate for this year fell from 5.69% to 5.42%. This occurred after the release of the results of the inflation for May, which added up to 0.23%, below what was expected by the financial market. In the previous 12 months, official inflation totaled 3.94%.
Economy Growth
Another positive result was the financial market projection for the GDP, which advanced from 1.68% to 1.84% in the second week of May. The increase in the projection of economic growth occurs after the release of the GDP result for the first quarter, which pointed to expansion of 1.9% in comparison with the last three months of last year. The result was above economists’ expectations.
Interest Rate (Selic)
The recent positive results in the economy were not enough for the Central Bank to review the country’s interest rate. On Monday (12/06), during a meeting with businessowners, Central Bank President Roberto Campos Neto herd complaints about the pressure generated on businesses due to the high interest rates and that some could go bankrupt because of that. Campos Neto avoided any objective response and said that the rate was a technical assessment and that he is very concerned with inflation.
The Monetary Policy Committee (Copom), which is responsible for defining the basic interest rate, will meet again on 20 and 21 June. The institution, part of the Central Bank, is expected to keep the Selic at 13.75% for the 7th time in a row.
Political Pressure
The senator and leader of the government in the National Congress, Randolfe Rodrigues (without party), criticized the BC president. In his social networks, Randolfe suggested that the executive had not met goals and that his departure from office should be analyzed by the Federal Senate. In addition, the congressman highlighted that the Central Bank autonomy law provides for the dismissal of the president of Bacen when he “shows proven and recurrent insufficient performance to achieve the institution’s objectives”.
Our Analysis:
The topic is quite relevant for the government’s political stability. President Lula needs to deliver his main electoral promises and obtain significant achievements, especially in the economy, in order to grow his political support among businessmen, the population in general and the politicians in Congress. However, the high interest rates have become a barrier for his economic projects, which include heavy investments in the industry sector, therefore, dependent on loans. The government has a weak condition in Congress, and now, the economic field has become another area where Lula has accumulated defeats, at least for the moment.
