Opinion – Vinicius Torres Freire: Interest rates rise in reaction to Lula 3 economy command and BC issues warning

On the day that the Lula 3 government announced two more important names in the economy, the Central Bank released a routine document, but one that implicitly talks with the economic policy alternatives now put on the table by the president-elect. Rather than promoting more growth, such plans could raise inflation, the dollar and interest rates.

The document is the explanation of the BC’s decision regarding the Selic, called “Copom Minutes”. The new names in the economy are Gabriel Galípolo, who will be Fernando Haddad’s executive secretary, and Aloizio Mercadante, president of BNDES.

Although he wrote that the scenario remains hazy, the BC management dedicated itself, more extensively than usual, to commenting on the risk of increasing government spending, direct or through state (“parafiscal”), and of try to reduce interest rates through public banks.

Mercadante, appointed to the BNDES, was Dilma Rousseff’s minister (Science, Education and Chief of Staff) and coordinated Lula’s program 3. Four days before the second round, the PT published the “Letter for Tomorrow’s Brazil”, synthetic guidelines of government. In economic terms, it was similar to Lula 2 and Dilma 1, especially in what went wrong.

Galípolo is a consultant, has worked with public-private interaction projects in investment and was president of Banco Fator. He is in favor of a strong rule to control public debt. As for the “parafiscal” and to summarize a convoluted subject, he believes that, given the scarcity of public money, the National Treasury and the BNDES should act more as guarantors and facilitators of private investment. Instead of spending, they retain part of the business risk in order to attract more domestic and foreign capital (“leverage”).

Lula 3 has shown, so far, that he is not worried about the negative effect of increased public spending. It may even be that Haddad does not spend what Congress authorizes in the PEC package; that he soon propose a fiscal rule (to contain the increase in the deficit and debt) that can be taken seriously. For now, to put it mildly, there is “uncertainty”, as the Central Bank puts it.

To government creditors and other money holders, Mercadante’s BNDES appointment suggests that the “Charter for Tomorrow’s Brazil” is for real.

BC management wrote that government spending can affect inflation by stimulating consumption and investment, its effect on the exchange rate (“dollar”), uncertainty, inflation expectations and the level of interest rates sustainable, “neutral” (the one that, in theory, prevents the economy from cooling down or overheating).

If spending increases when unemployment and idleness in companies are low, there is inflation in the vein. If spending tends to cause an accelerated increase in the public debt, the dollar and interest tend to rise: there may be a combination of inflation and a rebound in productive investments. Interest subsidized by state-owned banks (such as the BNDES) may force the BC to raise the basic interest rate (Selic) in order to compensate for the “discount” given in the rates administered by the government.

In short, without economic slack and confidence that the debt will not grow without limit, the additional spending backfires. In broad strokes, it is a description of the interpretation of standard economists on central mistakes of Dilma Rousseff’s economic policy.

So far, government creditors and money holders think that Lula is going that way. It’s evident in the rise in interest rates since Lula, elected, started talking about the economy — there’s no need to do an opinion poll. If this continues, “uncertainty” will become a serious risk of sinking.