Bolsonaro, the Copom, and the Selic rate.

By Paulo Kliass

The last meeting of the Monetary Policy Committee (COPOM) under the Bolsonaro government will be held between December 6th and 7th. As is customary, at the end of the 251st meeting, in the early evening of Wednesday, the Central Bank is expected to announce its decision regarding the level of the official interest rate, the SELIC. According to so-called "market expectations," the committee is not expected to change the current level, set at 13,75% per year.  

However, the reality is that the President of the Central Bank has been primarily responsible for one of the most disastrous trajectories of systematically raising this important tool of economic policy. The contraction in the level of economic activity from 2019 onwards allowed the institution to abandon its traditional preference for monetary tightening and risk a trial of lowering the rate. Thus, it reached 2% in August 2020 and remained there until March of the following year. However, the pressure to raise the SELIC rate never ceased and succeeded soon after, when the COPOM, led by Roberto Campos Neto, quickly resumed its upward trajectory.

Ultimately, it's always good to remember that one of the main sources of opinion formation among advisors is the weekly Focus survey, conducted by the Central Bank itself. The questionnaire is sent to a select group of executives from financial institutions, and its results are presented to the rest of society by the mainstream media as the opinion of this somewhat ghostly entity called "the market." It is based on this type of opinion and desire that the Central Bank incorporates its estimates of the SELIC rate, GDP, inflation, exchange rate, and other relevant variables of the future macroeconomic scenario.

The explosion in the SELIC rate: from 2% to 13,75%

Between March 2021 and August 2022, the Committee held 12 meetings, and in all of them, the rate was increased. Thus, the SELIC rate was multiplied by almost 7, reaching 13,75% at meeting number 248. This was an irresponsible increase that found no support in any minimally serious model of macroeconomic analysis, even those from the conservative camp. The argument at the time was the "urgent" need to combat the risk of a supposed inflationary spiral resuming. However, the fact is that rising prices would not be mitigated simply by raising the interest rate. After all, this was not demand-pull inflation. Let us remember that it was a time of rising food prices, electricity tariffs, and petroleum derivatives.

These are cases where combating prices would primarily fall to initiatives adopted by the government itself. But Paulo Guedes, the all-powerful super-Minister of Economy, professed and implemented an orientation in the opposite direction. Following the playbook of generalized liberalization and a minimal state, the banker took it upon himself to destroy the policy of regulatory stocks in the agricultural and food sectors. Thus, the capacity of the federal public administration to intervene through the stocks of the National Supply Company (CONAB) was reduced to zero. In the name of the liberal supremacy of granting all power to the sacrosanct balance of free supply and demand forces, Guedes eliminated the possibility of reducing the effect of food inflation on the IPCA (Brazilian Consumer Price Index).

Rising interest rates and inflation: one mistake after another.

In the case of electricity tariffs, the seasonality of the arrival of the drought and the anticipated decrease in dam levels also demanded more incisive government action to prevent consumers from becoming the main victims and to ensure that the increase in industrial, commercial, and residential electricity bills was also impacted and transmitted into inflationary indices. Therefore, it had nothing to do with any type of good whose consumption could be avoided through an increase in interest rates. But the government turned a blind eye to the adjustments authorized by ANEEL (Brazilian Electricity Regulatory Agency).

In the oil sector, there was also price growth due solely to the responsibility of Temer and Bolsonaro. By adopting the "international parity price" (PPI) policy in 2016, the government transformed into public policy the fallacious discourse of fifth-rate liberals, who criticized Petrobras' administered pricing policy. Recovering the narrative of free supply and demand, they began to implement the removal of the government from the definition of prices for inputs so fundamental and strategic to the economy and society as a whole, such as diesel, gasoline, and cooking gas. The "brilliant" idea was to link domestic prices in Brazil to fluctuations in the price of crude oil on the international market. Madness! Devaluation of the real against the US dollar and speculative increases in oil prices coordinated by OPEC caused the prices of refined products in Brazil to explode.

We need to lower the SELIC rate!

As expected, the social and economic cost of this liberal adventure was enormous. Most of society still suffers the consequences of a government's irresponsibility in doing nothing to curb inflation, despite having all the tools to intervene on the supply side in the aforementioned cases and refusing to act. Furthermore, there was a widespread explosion in financial costs due to the SELIC rate. Families and businesses were penalized by this movement, as were public coffers due to increased expenses on public debt interest. And the worst part is that the COPOM (Monetary Policy Committee) has maintained the rate at 13,75% to this day, refusing to offer any indication that it might decrease.

Since inflation is no longer the central concern, the financial system's arguments for maintaining the rate at such high levels are now focused on the behavior of fiscal parameters. Echoing the unwarranted alarmism of a supposed risk of "explosion in public accounts," experts defending the interests of the financial sector are already propagating the need to prevent the rate from falling, if not proposing a new increase. The excuse of the moment refers to the fear provoked by the debate regarding the need to revoke the spending cap policy and promote a return to the leading role of the State as a strategy to find a way out of the crisis.

The orthodox monetarist reasoning is indeed very crude. In this case, the journey begins with a genuine fear of an increase in the fiscal deficit and the public debt rate, which would undoubtedly lead to increased inflation and so on. For the people of finance, as always tends to happen, the solution would involve raising interest rates. It matters little what is happening in terms of unemployment, poverty, and misery. The interesting thing is that none of these scribes in service of the kingdom of finance remember to comment that the recent change in legislation – the same one that promoted the independence of the Central Bank – also included the need for the monetary authority to consider the level of economic activity among its parameters for establishing the SELIC rate. Article 1 of Complementary Law 179 It is explicit in this regard:

(...) “Article 1. The Central Bank of Brazil has as its purpose The fundamental objective is to ensure price stability.

 Sole paragraph. Without prejudice to its fundamental objective, the Central Bank of Brazil also aims to ensure the stability and efficiency of the financial system. to smooth out fluctuations in the level of economic activity and promote full employment..” (...) [GN]

Now, since the elected government's program points to the need to recover policies that were destroyed by Bolsonaro & Guedes, it's reasonable to assume that we will experience a new phase of increased government spending and a larger public deficit. This movement is anything but catastrophic; quite the opposite. It's what economists call "counter-cyclical measures," where the state enters the economic cycle by increasing its spending and investments to signal a broader recovery in growth and development. This is, in fact, exactly what the most developed capitalist countries did in the 2008/9 crisis and now in the more recent COVID-19 crisis.

COPOM under Lula: Bolsonaro's face

But the true anti-state crusade practiced by the ruling classes in our lands acts as an obstacle to this type of updating of the thinking of the international establishment itself being developed here as well. Our elites remain obstinate in their "more cuts and less state" approach. Thus, it is not at all improbable that the next COPOM meetings, already scheduled for 2023, will continue to ignore the political, social, and economic urgency of promoting a reduction in interest rates. Acting as a kind of fifth column regiment in service of finance within the state apparatus itself, the members of the council may be tempted to operate as militant saboteurs of the movements so necessary for the recovery of economic activity and the implementation of a national development project.

Taking advantage of the complicity afforded by the independence granted to them by the legislation presented by Guedes, most of the Central Bank officials appointed by Bolsonaro will remain in office throughout Lula's government. This is one of the main components of the disastrous legacy left by the outgoing government. Through the new rule, the new government is deprived of the legitimate right to implement one of the fundamental aspects of economic policy – ​​monetary policy. This means that the trajectory of the SELIC rate during Lula's government will be defined by the same individuals who did so during Bolsonaro's term.