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 inflation path are what have kept the Selic rate high, as pointed out in the follow-up report prepared by the Independent Fiscal Institution of the Federal Senate (IFI). With the highest level since the end of 2016, of 13.75% per year, the rate Selic It is the main tool used by central bank (BC) to contain inflation, as explained by the director of the IFI, Vilma da Conceição Pinto, in an interview with Young Pan News: “It is the main instrument of monetary policy. It is by means of this interest rate that he manages to loosen or tighten money, 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 base of the Federal Government in the National Congress has criticized Copom's decision and argues that there is room for a reduction in the Selic rate. This week, the Minister of Finance, Fernando Haddad, manifested itself on this issue, after the announcement of the return of federal taxes on fuels. According to the minister, the partial resumption of tax collection will benefit inflation in the medium and long term, which makes room for a fall in the Selic rate: “From an economic point of view, the measures that are being taken and announced today are beneficial for inflation in the medium and long term. Which makes room, according to the Central Bank, for a drop in interest rates. That's not what I'm 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 perspective of the Central Bank, this anticipates the calendar for a drop in interest rates. 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 reenactment of federal taxes on gasoline and ethanol, inflation also grows.
The IFI explains that the upward trajectory of prices is mainly due to fuel prices. The Central Bank's projections for inflation have risen since the end of last year. The projection of the Extended 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 prices in reais, administered prices will be impacted by the readjustment promoted by Petrobras in the 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 set by the National Monetary Council is 3.5%, with a tolerance margin of plus or minus 1.5 pp. According to the director of the IFI, 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 from different factors. I think the debate is valid and we can deepen the analysis in this sense, but I believe that the solution is a little more complex”, explained Vilma. In addition to inflationary pressure, another factor preventing a drop in interest rates at this time, according to the IFI, is indecision about fiscal policy. In the first half of the year, the government should present a 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 observes that the effectiveness of such measures is limited and that the sustainability of the accounts will depend on the collection performance.
*With information from reporter David de Tarso