High interest rates in Brazil affect expectations of companies and consumer demand

The rise in the basic interest rate is one of the variables that, added to the escalation of inflation, a still fragile labor market and the scarcity of inputs, left the economy practically stagnant in the third quarter.

This Wednesday (8), the BC’s Copom (Monetary Policy Committee) raised the basic interest rate from 7.75% to 9.25% per year. By early 2021, it was at 2%. The projection is that it will be close to 12% next year. Brazil leads the pace of interest rate hikes in 2021, with inflation among the highest on the planet.

According to the executive manager for Economy at the CNI (National Confederation of Industry), Mário Sérgio Telles, there has already been a significant increase in interest rates for final borrowers, both companies and individuals. Concessions continue to grow, but the industrial sector is already preparing for the impact of the monetary contraction on consumption.

“Companies will soon face an even more significant retraction in demand due to this monetary policy. We can already feel these signs, and the tendency is for the situation to worsen, because the effects are lagged”, said the economist before the last announcement of the Copom.

Telles stated that, as this movement is already being reflected in activity, there is no need to increase the rate of interest rate hikes, as advocated by some market institutions. For him, there must be time for the Central Bank to assess the impact that the reduction in demand will have on inflation rates.

“The effect of the demand retraction on prices may be surprising. It may not be necessary to have a monetary policy as restrictive as it is being signaled. Bringing inflation into the range [da meta, de até 5%,] it would already be an objective fulfilled by the BC. The adjustment can be gradual so that the effect on the activity is mitigated”, he says.

This Wednesday, after the Copoms announcement, the CNI released a statement in which it claims to consider the committee decisãos decision wrong. The confederation reiterates its assessment that a less intense Selic increase, together with previous increases, would already be more than enough to bring inflation to the target, without the BC increasing the probability of recession.

The organization’s president, Robson Andrade, stated that the last two quarters of GDP (Gross Domestic Product) retraction made evident the adverse scenario of economic activity. The entity’s confidence, invoicing and production indicators already show cooling at the beginning of the last quarter of 2021.

Economist Catarina Carneiro da Silva, responsible for the index of Intention to Consumption of Families at CNC (National Confederation of Commerce), says that the issue of access to credit was the main factor that brought down the indicator in November.

According to her, the uncertainty regarding the time needed to cool down the inflationary process and the level that interest rates should reach is already influencing consumption and generating more caution.

“This retreat was influenced by the upward trend in interest rates initiated by the Central Bank to contain the rise in prices,” he says. “Families are already starting to feel this difficulty.”

On Wednesday (8), CNC revised its expected growth in retail trade sales for this year from 3.6% to 3.1% and projects an increase of 1.2% in 2022. The adjustment took place after the monthly survey IBGE’s trade index points to a fall in the index for the third consecutive month, accumulating a 5.3% retraction since August this year.

Central Bank data show that virtually all credit lines for individuals and companies have become more expensive in recent months.

The average bank interest rate reached 32.8% a year in October, the highest since the start of the Covid-19 pandemic. In the accumulated result for the year, the increase observed is 7.3 percentage points. The default calculated by the institution did not change. In the accumulated result for the year, the credit stock grew 12%.