Real interest rate is highest since Dilma’s second term

Real interest rates in the country are at levels similar to those of the second term of former President Dilma Rousseff (PT), between 2015 and 2016. Expensive credit and its causes —strong inflationary pressure caused by domestic fiscal imbalances associated with disturbances abroad— reveal parallels between the current crisis and the one that contributed to the impeachment of PT.

The indicator, which can be a parameter for consumers to assess how expensive credit is, also reveals the price that investors charge to bring money to the country.

In September 2015, during Dilma’s government, the future interest rate, discounting expected inflation for the 12 months ahead, reached a peak of 9.5% per year. This was the so-called real interest rate of the economy of that period.

At the time, the president was dealing with a scenario of devaluation of raw materials exported by Brazil, soaring prices caused by the increase in public spending in her first term, and political pressure from opponents and allies who disagreed with her fiscal adjustment strategy in midst of the crisis.

Today, this indicator of real interest is around 8.5%, according to calculations by Nova Futura Investimentos based on data from the Central Bank.

Up for the fifth consecutive week, DI (Interbank Deposits) interest for 2023 and 2024 is already above 13.8% per year. These contracts, negotiated exclusively between banks, reveal the expectations of the credit market and serve as a reference for financing and loans.

High interest rates slow down the economy by discouraging consumption and encouraging savings. Rates such as those charged directly from consumers, which have also been rising, can be much higher than benchmarks.

Vehicle financing rates, for example, vary between 13.5% and 55% per year, while real estate financing on the market can have an annual interest rate of up to 17.99%, according to a June survey by the Central Bank. The credit card revolving rate, in most institutions, exceeds 300% per year.

As with Rousseff’s government, the current increase in the premium to investors — and the cost to borrowers — also has external components and domestic fiscal imbalances.

This credit squeeze may gain even more strength after this week, when inflation hit a record in the United States and, in Brazil, the government of President Jair Bolsonaro (PL) managed to pass a PEC (proposed amendment to the Constitution) that expands social benefits. in an election year and whose cost is estimated at more than R$ 41 billion.

Uncontrolled US inflation puts pressure on Fed rates (Federal Reserve, the US central bank), which become more attractive and take dollars from riskier economies, such as Brazil. A scarce dollar becomes expensive, raises import costs and generates more inflation, whose control requires even higher interest rates.

External inflationary pressures tend to have similar dynamics, but it is the magnitude of the current shocks and the way Brazil is dealing with them that make the scenario more worrying, according to Nicolas Borsoi, chief economist at Nova Futura.

Abroad, the supply shocks caused by Covid and the Ukrainian War tend to favor regionalization in some segments, especially in energy generation. “This will increase costs and result in more inflationary pressure,” says Borsoi.

Domestically, the PEC of billions indicates an expansionary stance of the government’s fiscal policy, even in a period of contraction of the Central Bank’s monetary policy.

“We should have an inflationary deceleration with the adjustment of the Central Bank, but the government decided to make fiscal stimulus until the end of the year. This should put more fire in inflation”, comments Borsoi.

“It may be that we still haven’t seen the top of interest rates around here. This is the big message that remains from this incongruity between fiscal and monetary policy”, says the economist.

Davi Lelis, economist and partner at Valor Investimentos, points out that the threat of fiscal imbalance imposed by the PEC also interferes in the assessment of the risk premium charged by investors to invest in Brazil. In practice, they start demanding higher interest rates.

Considering that the increase in government spending will also put pressure on inflation next year, the size of the credit crunch that will be required in 2023 could put the country on the path of recession, according to the economist. “It’s a cold shower on the economy when you raise interest rates,” he says.

Lelis and Borsoi emphasize that the emergency support offered by the government to the population is necessary, but say that the timing and the form chosen erode the country’s credibility, since the decision modified the Constitution to allow for increased spending even during electoral periods.

“This election year brings fleeting benefits, failing to comply with the electoral rule, and this stresses the interest curve”, says Lelis. “Given the deteriorated scenario, there is a flight of dollars abroad, and this also stresses inflation.”

Victor Beyruti, an economist at Guide Investimentos, says that the PEC has a relevant weight in the rise in interest rates, but says it is “difficult to pinpoint the weight of each catalyst”, also considering a scenario of persistent inflation abroad and the threat of global recession.