This week’s subject is boring, but it would have to be tackled by this column sooner or later. The topic is the interest rate. The Monetary Policy Committee (Copom), composed of the president and the eight directors of the Central Bank, decided last Wednesday that the basic interest rate of the economy, Selic, will be kept at the same 10.5% per year as it was before the meeting. The decision interrupted the cycle of cuts that began almost a year ago, at the meeting on August 2, 2023 — when the rate was reduced from 13.75% to 13.25%.
Copom meetings take place every 45 days and, since then, they have always determined discrete but constant interest rate cuts. Analysts assessed that, given the conditions of the Brazilian market and the international market, there would even be room for a faster fall in interest rates. But the Copom opted for more cautious moves, always justified in the minutes of the collegiate meetings by the fear that a faster fall in the Selic rate in an environment of uncontrolled public accounts could mean a new cycle of uncontrolled inflation.
But the slow declines continued until, at the May 8 meeting, they reached the current 10.5%. Last week’s decision interrupted this cycle of declines – and, according to analysts’ expectations, the Selic should remain at the point it is at until the end of the year. Forecasts made in January indicated that the rate would reach 9% by the end of the year.
“CAPACITY FOR AUTONOMY” — The decision could have been received with serenity and dealt with strictly from the technical point of view noted in the minutes of that meeting. But, in Brazil, even the minutes of the Copom are treated as political pamphlets, and if the discussion of any subject does not involve a dose of intrigue, it is not funny. At the previous meeting, as the press got tired of reporting, the four directors of the Central Bank appointed during Lula’s government had voted together for the rate to be below the 10.5% decided by the collegiate. They wanted to lower it to 10.25%.
The president of the institution, Roberto Campos Neto, who came to office on the recommendation of former President Jair Bolsonaro – and remains there due to the law that gave independence to the Central Bank and ensured fixed four-year terms for its directors – understood that a deeper cut in interest rates could have unpleasant impacts on the economy as a whole. He and the other four directors appointed in the previous government, who are still on the board, understood that it was not yet time for this.
At last week’s meeting, which kept rates at 10.5%, there was consensus. The nine members of the Copom, including economist Gabriel Galípolo – tipped to take the helm of the Central Bank at the end of Campos Neto’s term at the end of this year – voted to keep interest rates at 10.5%. So far, no surprise. Both the disagreements of May 8 and last week’s consensus were discussed at length by the press – with President Lula sparing no criticism of Campos Neto on both occasions.
“A president of the Central Bank who does not demonstrate any capacity for autonomy, who has a political side and who, in my opinion, works much more to harm the country than to help, because there is no explanation for the interest rate being the way it is,” said Lula about Campos Neto in an interview with a radio station, when commenting on last week’s result.
With his peculiar way of seeing the world – where all vices are with others and virtues with him – the president never mentioned that, in addition to Galípolo, Ailton de Aquino dos Santos, Paulo Pichetti and Rodrigo Alves Teixeira, all appointed by him, also voted this time to keep interest rates at the level they were at before. Like their colleagues linked to the previous government, who were already part of the Copom before they arrived to join the collegiate at Lula’s appointment, the economists understood that the situation of the external and domestic markets requires careful treatment and does not allow, at this moment, a greater reduction in the rate.
Lula’s criticism is a kind of mantra that throws on Campos Neto’s shoulders the criticism for all the problems of the Brazilian economy for the fact that he got to where he is in the previous government. So much so that, in the face of his team’s inability to propose projects capable of getting the economy moving consistently, the president had referred to the head of the Central Bank, on the eve of the Copom meeting, as “the only thing out of step with the economy.”
“ACCOUNT OF THE BRAZILIAN PEOPLE” — Words like these, of course, are part of a movement that makes the president of the Central Bank a kind of Judas Iscariot on Hallelujah Saturday: working out is part of the party. On the same day of the Copom meeting, the PT caucus in the Chamber filed a lawsuit with the TRF of the 1st Region that bears the signature of 59 of the party’s 68 federal deputies.
Perhaps imagining that the directors appointed by Lula to the Central Bank, as at the May meeting, insisted on the continuity of the reduction of the interest rate, which the president of the institution intended to hold at 10.5% – as had already been signaled before Wednesday – Their Excellencies decided to speak out about something they do not understand. And in doing so, instead of shaking him, they helped Campos Neto to hold fast to the position from which they intend to remove him before the end of his term.
According to the PT group, Campos’ stance contributes to “significantly affecting the credibility of the institution and the proper conduct of monetary and financial policies.” Don’t worry, there’s more! Ignoring for convenience the past of the PT administrations with regard to the interest rates of the Central Bank, the leader of the bench of the ruling party, Odair Cunha from Minas Gerais, said: “We cannot think it is normal for the Central Bank to withdraw money from the account of the Brazilian people—RS800 billion in the last twelve months—to pay the costs of the debt.”
Detail: in Lula’s first term, when the whole world was still looking with a certain suspicion at the treatment that his team would give to the economy, the Copom, under the presidency of Henrique Meireles, gave a demonstration of orthodoxy by raising the rate to 26.5% per year and keeping it that way throughout the first half of 2003. It was only after the government won the confidence of investors that a downward movement in interest rates began. Only in April 2009, in the final stretch of Lula’s second term, interest rates fell below the current 10.5%.
ELECTORAL CORRALS — Yes! Brazilian interest rates are among the highest in the world – a position they have rarely failed to occupy over the last few years. And one of the explanations for this is precisely the contempt that Odair Cunha, his colleagues on the bench and most Brazilian politicians show for the health of public accounts.
In the impossibility of drawing, we will try to explain it in the simplest way possible so that Cunha and those who think like him can understand why the basic interest rates in Brazil are so high. If the deputies did not spend money on parliamentary amendments that only benefit their electoral corrals; if there were no Constitution that freezes funding expenses and practically forces current expenditures to increase at the pace of inflation; if parliamentarians did not spend all their time pressuring an Executive that is a spendthrift by its very nature to spend even more; if there were a minimum of respect in the country for what Cunha eloquently calls the “account of the Brazilian people”; If the government, after all, were to inspire security in investors who buy bonds to finance it, it would not have to pay such high interest rates in exchange for the bonds it launches on the market to close its accounts. It’s that simple!
Another interesting point is that, in this or any other country, not everything related to interest is under the responsibility of the monetary authority. The official banks, which are under the direct responsibility of the government, are unable to take a single step to reduce the exorbitant rates they charge those who need to borrow to keep their business alive and avoid unemployment. The same goes for the salaried person who is unlucky enough to resort to the overdraft limit. He would thank God if the interest he needed to pay to get out of the difficulties was that of the Selic.
STIMULUS POLICIES — In countries that take their own economy seriously, development banks, such as BNDES, are instruments of the State and finance development with interest rates below those practiced by the market. The logic of this system is to allow the government to promote policies to stimulate investment in times of retraction. Or that, in normal situations, it keeps open credit lines capable of allowing companies to continue expanding.
In the past, BNDES worked with the Long-Term Interest Rate (TJLP), which fulfilled precisely this role. As of January 2018, during the Temer government, it was replaced by the Long-Term Rate (TLP), adopted precisely so that BNDES could start working with interest rates similar to those of the market. Currently, the TLP is 5.91% per year, plus the IPCA.
The final fee to the borrower, however, is not limited to this. It is also added to the cost of raising the money transferred, the bank’s remuneration (the so-called spread) and the credit risk rate — making the development bank’s financing conditions prohibitive for most companies. Since the current government took office, the market has been waiting for this criterion to change. So far, however, this change has not come and no criticism of the TLP has ever been heard from any government official—although the bank’s staff has more than once advocated for an end to this system.
The question is: why does President Lula criticize Campos Neto and not give the president of BNDES, Caixa, Banco do Brasil or other public banks a direct order for them to reduce the interest they charge to indebted companies and individuals? The answer is simple: the president’s concern is not with the financial health of companies, but with the expansion of the budget provided by the cut in rates.
According to a calculation made by experts in public accounts, each percentage point of cut in the Selic means, at the end of a year, a reduction of just under R$ 50 billion less in interest payments. And if that money doesn’t go toward debt repayment, it can be used to increase government spending.
The slow and gradual cuts made by the Copom since August last year have already produced a reduction of 3.25 percentage points in the interest rate. It doesn’t seem like much, but it’s not. In a rounded account, this will mean, in the worst case, an availability of more than R$ 150 billion to spend. And the postponement of the cut of another 1.5 points necessary for the Selic to reach the end of 2024 at the 9% forecast at the beginning of the year will cost the government no less than R$ 75 billion.
POPULARITY RATE – In the interpretation of those who know the behavior and political logic of the current federal administration – for whom to govern is to spend money without worrying about tomorrow – the reduction of the Selic rate would contribute to increasing another rate, which worries Lula much more than interest rates. This is the popularity index.
A poll by the Datafolha Institute released on Tuesday of last week shows the government in a situation very similar to the one it was in in the previous survey – and for a politician who seems to put the popularity rate at the forefront of his concerns, this data is worrying. The percentage of those who consider the government to be great or good — and who therefore express an unconditional approval of the president — which was 35 percent, jumped to 36 percent. Absolute disapproval, which was 33 percent, fell to 31 percent.
For this group, nothing changes and will not change between now and the 2026 elections. Those who approve, and who have been varying within the so-called “margin of error” in recent surveys, will continue to approve. Inflation could skyrocket, allegations of corruption could explode, ten new ministries could be created, it could even rain a knife: this group will never leave Lula without support.
The same reasoning applies to the 31% who reject the government and do not wait for measures to be announced to say that they will never work. If it came from Lula, it’s wrong! There is no deal possible! The president can reduce inflation to zero and put the government to work with the organization of a symphony orchestra that will never count on the votes of this group!
No sample is able to accurately reflect the moods of the population. In the specific case of this Datafolha survey, carried out between June 4 and 13, 2088 people were interviewed in 113 of the 5568 municipalities in the country. As scientific as the construction of the sample was, it is very difficult to rely on these numbers to draw any conclusion other than that the country continues to be immersed in a mire very similar to what it had under the previous government.
Everything indicates, to Brazil’s dismay, that the political environment of 2026 will be as polarized and belligerent as that of 2022. And, in a scenario like this, each point less in the basic interest rate can give the government more money to spend and, consequently, more weapons to face the 2026 battle with more chances of staying in power for another four years.
