The contradictory signs on the part of the federal government in facing the covid-19 pandemic and the lack of a clear commitment to the maintenance of the policy of control of public expenditures left the central bank without many outlets, in addition to starting a new cycle of increasing the Selic, according to an evaluation by economists surveyed by Estadão.
According to them, the increase of 0.75 percentage points, taking the basic interest rate to 2.75% per year, would demonstrate the lack of alternative for the Central Bank, which needed to act quickly to control inflation expectations. The increase, however, should have a negative effect on the cost of public debt and may further depress economic activity, aggravating unemployment – at a time when the country is setting death records and the covid-19 pandemic is still out control.
As part of the domestic debt is directly linked to the Selic rate, as interest rates rise, so does the cost of carrying the debt. An estimate by broker Necton points out that the increase of 0.75 points in basic interest rates may lead to an increase of R $ 25 billion in debt in the short term. Higher interest rates also tend to have a negative impact on economic activity.
For Silvia Matos, coordinator of the Macro Bulletin, of the Brazilian Institute of Economics of the Getúlio Vargas Foundation (Ibre / FGV), it is a fact that the cycle of high interest rates will have a negative effect on economic activity, which is already weak. But the Selic increase will not be a cause of weakness, but a consequence of this whole scenario.
“It is not possible to think only of interest rates. It is necessary to assess that the country is in a great imbalance. Before the pandemic, the debt was high, but converging. After a shock, with short-term spending, we will have a second year of extraordinary spending and great difficulty in containing the pandemic. “
She points out that it would be necessary to offset the increase in expenses resulting from the pandemic with medium and long-term counterparts and reduce mandatory spending. “We are left with a high debt and have not yet resolved the pandemic issue. We should not be talking about raising interest rates now, due to the weakness of the economy, but the BC is acting in accordance with its objectives.”
Credit Suisse’s chief economist in Brazil, Solange Srour, agrees that the rise in interest rates was a necessary movement. “It is a process that has started now and should only end when interest rates reach 6.5% per year. It is necessary to anchor the inflation expectation. Certainly, this has an impact on the debt, but the Central Bank cannot make an interest policy looking at The debt.”
“Brazil ends up having to raise interest rates earlier than it could, as it did not approve a more robust emergency Constitution Amendment Proposal (PEC), with tougher triggers. And we should be presenting an effective proposal to cut spending, with the administrative reform, but there seems to be no effort to pass it. “
Alexandre Schwartsman, consultant and former director of central bank, argues that there was a shock coming from the combination of rising commodity prices (commodities) and the dollar, also rising, which normally does not occur.
“Did BC have alternatives? I suspect not. Did the government have alternatives? Certainly. If it managed to signal a change in the trajectory of spending, deficits and debt, the dollar would probably be less pressured and would have fallen in response to the increase in commodities, which it would allow the BC to normalize monetary policy later and at a slower pace, “he says.
“The devaluation of the real has no connection with the Selic”, dismisses the economist at the University of Brasília (UnB) José Luis Oreiro. “What led to the devaluation of the currency was the uncertainty caused by the pandemic, the government’s environmental policy that alienates foreign investors and the fight against the pandemic itself,” he says.
Oreiro adds that the scenario for the Brazilian economy in 2021 it’s from emergency aid lower than last year, the BC started a new cycle of interest rate increases and the adoption of lockdown measures to try to contain the increase in deaths and contamination by covid-19. “The effect of higher interest rates on the economy will come from the second half of this year.”