Opinion – Vinicius Torres Freire: Interest crunch goes further, says BC, which sends a message to Bolsonaro

The dose of the medicine will be smaller, but the treatment will go further. The Central Bank increased the basic interest rate from 10.75% a year to 11.75% a year, but almost promised that the Selic rate will go to 12.75% in May. Aside from miracles in politics and in the economy of Brazil and the world, it won’t stop there: 13% is a floor. The monetary crunch approaches that seen in 2015, in the Great Recession.

It could be even worse, depending on what will become of the war, the level of madness in the electoral campaign and what Jair Bolsonaro will do with public spending.

BC always makes “fiscal” alerts. That is: it says that more expenses and debt growing without limit imply higher interest rates. But he gave an extra message in Wednesday’s statement.

It is written there: “…fiscal policies that imply an additional boost in aggregate demand or worsen the future fiscal trajectory may negatively impact the prices of important assets and increase the country’s risk premiums”.

“Important Assets”: dollar.

“Additional boost from aggregate demand”: the government tries to increase consumption a little in order to make the GDP grow a few tenths more, alleviating the hardships of the little people with a few caraminguás, which maybe earns a few points in the polls.

It is what Bolsonaro has done and will still try to do. The government reduced taxes (on industrialized products; with congressional help, on diesel and other fuels). Intends to release the withdrawal of part of the FGTS money. You will anticipate the payment of the 13th benefit of the INSS. Want to give cheaper credit to small and medium-sized companies.

These are measures that go against the inflation control policy. On the one hand, these monies blow some embers of consumption into an inflated economy. On the other hand, the measures can create suspicion that Bolsonaro wants to kick the door in the safe, spend more, take on more debt, which, in theory, can even make the dollar more expensive and interest rates longer (but, frankly, it will know).

Yes, the BC also stated that these fiscal and political risks are already partly incorporated in inflation expectations and in the dollar. In short, at market prices. But there is a possibility, not yet computed, of things getting worse, says the BC (“bull asymmetry in the balance of risks”).

In a statement colored by alternative scenarios, given the uncertainty increased by the war, the BC said it also reaffirmed that it will be aggressive. That is, it will bring inflation to the target in 2023 (the 2022 one was already) and that will not stop until inflation expectations fall to these targets.

The BC’s basic projection for 2022 inflation is 7.1% for 2022 (above the market median) and 3.4% for 2023. That is, they are projections based on the estimate that the Selic reaches 12, 75% in 2022. Apparently, the Selic goes further.

It says there: “…in light of its projections and the risk of expectations de-anchoring for longer terms, it is appropriate that the monetary tightening cycle continues to advance significantly into even more contractionary territory”.

The sharp shock of commodity prices may pass. But the effects of the crisis will last longer, due to greater changes in the world economy and politics. The Brazilian mess can still contain the recent wave of appreciation of the real, always a refreshment in inflation.

All else being equal, Brazil will grow less. The interest bill will be something bigger, as will the public debt.

Stabilizing this debt will be more difficult (it will require more taxes or also more spending restraint, unless the GDP “growth miracle” occurs). The situation for the 2023 government also gets more difficult.