Why interest rates continue to rise and could disrupt Bolsonaro’s re-election plans

Brazil returned to having a basic interest rate in the double digits. The Central Bank’s Copom (Monetary Policy Committee) raised the Selic rate this Wednesday (2) to 10.75% per year.

This was the eighth increase in a row — before the decision, the rate was 9.25% —, in the midst of the BC’s attempt to contain inflation, which has accumulated an advance of 10.2% until mid-January.

With the new high, interest rates in Brazil are back to double digits for the first time since May 2017 (when the Selic was at 10.25%), in a very different scenario from the beginning of 2021, when the basic rate reached 2%, lowest level in history.

Higher interest rates make it more expensive to borrow money, which should put a brake on business investments, slowing job creation and economic activity as a whole.

The worsening of activity, combined with an inflation that shows no signs of slowing down, are a thorn in the side of President Jair Bolsonaro (PL), who is seeking re-election in October.

Genial/Quaest electoral poll released in January showed that, for 37% of Brazilians, the economy is the country’s main problem today. This percentage includes concerns about unemployment, inflation and economic growth.

The anguish with the direction of economic activity outweighs the concern about health and the pandemic, identified as the main problem by 28% of Brazilians, even in the midst of a beginning of the year marked by an explosion of cases of Covid-19 caused by the ômicron variant. of the coronavirus.

Third among the population’s concerns are social issues, including hunger, poverty, inequality and housing, identified as the biggest problem by 13% of Brazilians, and also a direct consequence of the economic situation.

This scenario, according to analysts interviewed by BBC News Brasil, tends to strengthen the opposition, to the detriment of the continuity of the current government.

And it is also unfavorable for “third way” candidacies linked to the right, who face difficulty in distancing themselves from their links with Bolsonarismo.

Understand the recent interest rate hike; why inflation does not subside even with the Selic rate so high; and how all this should affect his life and the political future of the country.

‘Cause interest rates keep rising

Luana Miranda, economist at asset manager Gap Asset, explains that the Central Bank is already eyeing 2023 inflation when making its decisions at the beginning of the year.

“For 2023, the expectation for inflation is a little above the target, at 3.5%, which is uncomfortable for the BC, as it is still a distant horizon”, says Miranda.

The inflation target for 2023 is 3.25% and the fact that expectations are at 3.5% indicates that economic agents are not confident that the BC will be able to bring inflation back to the target by then.

This forces the monetary authority to continue showing toughness in the fight against inflation, in an attempt to “anchor” market expectations, as they say in economic parlance.

In addition, the most recent inflation indices have surprised by coming above what analysts expected, even after the Central Bank raised the Selic by 7.25 percentage points throughout 2021, from 2% to 9.25% per year. , the biggest increase made by a central bank in the world last year, according to a survey by the German bank Deutsche Bank.

“We already have a double-digit Selic, we are approaching the end of the cycle [de alta dos juros]but at the same time upward pressures from short-term inflation continue,” notes the economist at Gap Asset.

She highlights, for example, the rise of 0.58% in the preview of January inflation, measured by the IPCA-15, which came well above the 0.45% that was expected by the market.

“We continue to be surprised and, in addition, we have seen central banks around the world also surprise with promises of higher interest rates. [do que era esperado antes]. And that has an impact on our economy as well,” he says.

The rise in interest rates in mature economies, such as the United States, attracts resources to these countries, leading to the appreciation of the dollar and other strong currencies and the loss of value of the real.

This contributes to keeping inflation under pressure, since a relevant part of the Brazilian industry’s inputs is imported. It also favors food exports, reducing their supply in the domestic market, which weighs on prices.

Why inflation remains high, even after so much interest rate hikes

But the reader must be wondering: if the BC raises interest rates to make it difficult to take out credit, slow down economic activity and thereby contain inflation, then why do prices continue to surprise upwards?

Luana Miranda, from Gap Asset, explains that this is due to a set of factors.

The first is that monetary policy takes some time to have an effect on the economy, around four quarters, according to studies by the Central Bank itself.

Thus, as the BC started to raise interest rates in March 2021, and continued to raise rates during the following months, it is only during 2022 that the effects of this monetary tightening should actually be felt in the economy.

A second factor is the rise in commodity prices, particularly oil, which has an impact on fuel prices in Brazil.

Oil prices have been under pressure since 2021 by a combination of supply restriction by OPEC (Organization of Petroleum Exporting Countries) and investments that oil companies have stopped making in the midst of the pandemic.

Added to this already unfavorable scenario, in 2022, was the crisis between Russia and Ukraine, a country that is an important natural gas transport route.

A third factor is the continued pressure on industrial goods prices, in the face of problems in production chains generated by the pandemic, such as the lack of semiconductors that affected the automotive industry around the world.

This is in addition to the increase in service prices, given the resumption of the sector with the reopening of the economy made possible by the advance of vaccination worldwide.

Finally, the drought in southern Brazil affected the grain harvest, which tends to have an impact on food prices, as grains are used in the production of oils and animal feed.

“There are several shocks still affecting the economy, at a time when monetary policy has not yet had time to reduce inflation to its maximum capacity”, concludes Miranda.

How high interest rates affect people’s lives

The higher Selic has a direct impact on the daily life of the population, explains the economist.

“It will affect, for example, the price of taking out a loan. Credit card credit, overdraft credit, real estate credit, all of this will become more expensive. This tends to reduce household consumption and corporate investments .”

For this reason, higher interest rates slow down economic activity and, as a consequence, inflation loses strength.

“But this comes at a cost and can have an impact on job creation,” he adds.

Another concern is the effect of high interest rates on delinquency and household indebtedness.

According to the CNC (National Confederation of Commerce in Goods, Services and Tourism), the indebtedness of Brazilians reached the highest level in 11 years in 2021, with an average of 70.9% of people in debt.

Even so, delinquency had a small drop last year, in relation to the historical average. But, for the analyst, this picture may change with the rise in interest rates.

“Rising interest rates worsen the conditions for debt renegotiation and new borrowings. Anyone who gets into debt now will pay much higher interest than last year.”

“With a pressured job market scenario, lower average wages and more compromised family income, this points to a greater indebtedness, not least because families, over the last period, must have already consumed a lot of their savings. debt going up, delinquency going up is the next step.”

And how all this affects Bolsonaro and the political landscape in general

For Luana Miranda, inflation is Bolsonaro’s main “thorn in the side”, which is clear from the latest measures announced by his government, such as the PEC (Proposed Amendment to the Constitution) on Fuels, which aims to eliminate federal taxes on some of these fuels. inputs such as diesel. In addition to a possible reduction of the IPI (Tax on Industrialized Products), currently being studied by the economic team.

“Inflation weighs heavily on the population’s pocket and much more on the pockets of the poorest. So Bolsonaro is much more concerned with this than with GDP growth”, he considers.

Rafael Cortez, political scientist at Tendências Consultoria, recalls that both inflation and the sharp rise in interest rates are symptoms of macroeconomic instability that results from the government’s choices, especially in relation to public accounts.

“The falling economy and the advance of social vulnerability generate incentives to bet on candidates who oppose the status quo”, observes the political analyst.

“It is not by chance that former President Lula leads in the main electoral scenarios and as a more difficult economic scenario is confirmed, this preference for names distant from the government should crystallize. opposition”, he says.

For Cortez, the scenario is also difficult for “third way” applications.

“The majority of third-way candidacies — perhaps with the exception of former minister Ciro Gomes — are from the right. , as they were linked to a greater or lesser degree with it. Making this turnaround is not trivial.”

If the economy hampers Bolsonaro’s re-election project and the success of a third way, it should also pose a major challenge to whoever takes over the federal government in 2023.

“The economic agenda will leave a difficult legacy, whether for a second Bolsonaro term or for a new government. We have a combination of social vulnerability, very unstable economic policy and a very large fiscal risk.”

“Having to control inflation, balance government accounts and respond to social demands will be a very difficult equation to close”, evaluates the political analyst, regarding the challenges of the government that will begin in 2023.