Monitoring prepared by the Independent Fiscal Institution of the Federal Senate (IFI) details the reasons for maintaining the basic interest rate at 13.75%
Uncertainties about the trajectory of inflation would be what has kept the Selic rate high, as pointed out in the monitoring report prepared by Independent Fiscal Institution of the Federal Senate (IFI). With the highest level since the end of 2016, at 13.75% per year, the rate Selic is the main tool used by central bank (BC) to contain inflation, as explained by the director of IFI, Vilma da Conceição Pinto, in an interview with Jovem Pan News: “It is the main instrument of monetary policy. It is through this interest rate that he is able to loosen or tighten monetary policy, and thus have an influence on the inflation rate. When we look at fiscal policy, it also tends to influence the inflation rate, aggregate demand and the economy, when the government adopts a more expansionary or more contractionary fiscal policy. If we look at it from the point of view of fiscal policy and monetary policy, they can act in a coordinated way, or not. So this all influences these relationships between interest rates, inflation and fiscal policy.” Since August last year, four meetings of the Central Bank Monetary Policy Committee (Copom) and the index remained unchanged, even after 18 months of increases.
The Federal Government's base in the National Congress has criticized the Copom's decision and argues that there is room for a reduction in the Selic. This week, the Minister of Finance, Fernando Haddad, spoke out on this issue, after the announcement of the return of federal taxes on fuel. According to the minister, the partial resumption of tax collection will benefit inflation in the medium and long term, which leaves room for a fall in the Selic: “From an economic point of view, the measures being taken and announced today are beneficial for inflation in the medium and long term. Which opens up space, according to the Central Bank, for a fall in interest rates. That's not me saying, it's the minutes of the Central Bank (…) President Roberto Campos Neto also reinforced that these measures may suggest that they are unpopular and wrong, but they are not. From the Central Bank's perspective, this anticipates the interest rate drop schedule. I am reproducing arguments from the Central Bank to say that the impact on medium and long-term inflation is beneficial”. As fuel prices change, such as what happened with the reinstatement of federal taxes on gasoline and ethanol, inflation also grows.
The IFI explains that the upward trajectory in prices is mainly due to the price of fuel. The Central Bank's projections for inflation have been rising since the end of last year. The projection of the Broad National Consumer Price Index (IPCA) for 2023 was raised from 5.3% to 5.6%. Despite the expectation of a slowdown in market prices, given the downward trend in commodity values in reais, administered prices will be impacted by the adjustment promoted by Petrobras at distributors at the end of January. For 2024, projected inflation rose marginally from 3.7% to 3.8%, as per the report. The current inflation target established by the National Monetary Council is 3.5%, with a tolerance margin of 1.5 pp more or less. According to the IFI director, all these points must be considered in order to lower the interest rate.
“When we think about the interest rate, whether it is high or low, and how we can act to reduce this interest rate in the country, we have to look at it based on several factors. I think the debate is valid and we can deepen the analysis in this sense, but I believe the solution is a little more complex”, explained Vilma. In addition to inflationary pressure, another factor preventing interest rates from falling at this time, according to the IFI, is indecision over fiscal policy. The government should present in the first half of the year the proposal for a new framework for controlling public accounts, which will replace the spending ceiling. Meanwhile, the Ministry of Finance presented a package of fiscal adjustments, but the IFI notes that the effectiveness of such measures is limited and that the sustainability of the accounts will depend on the performance of collections.
*With information from reporter David de Tarso