The Copom and the Selic rate in 2023

The announcement of the decision from the 249th meeting of the Monetary Policy Committee (COPOM) came as a surprise. The statement released in the late afternoon of September 21st indicated the interruption of a series of twelve previous meetings in which the benchmark interest rate had been systematically increased. Thus, after 18 months of uninterrupted increases, the SELIC rate finally remained at 13,75% per year.

The expectation that the body responsible for establishing the basis of monetary policy in Brazil would once again increase this instrument stemmed from the almost simultaneous meeting of its counterpart in the United States. On the same day, the Fed decided to increase its rate range by 0,75%, raising the ceiling from 2,5% to 3,25% annually. As often happens in such situations, a number of central banks around the world chose to follow the Americans and also raised their rates. This was the case, for example, with the Bank of England, Norway, South Africa, Switzerland, and Sweden. Furthermore, a few days earlier, the European Central Bank had also decided to raise its rate, from zero to 0,75%.

Despite all these external factors conspiring for a new rate hike to be sponsored by the COPOM (Monetary Policy Committee), the committee opted for caution. Some analysts find the explanation in the fact that the SELIC (benchmark interest rate) was already at a level far above what was reasonable or necessary, even under a conservative approach in terms of macroeconomic analysis. After all, the directors of the Central Bank (BC) had already promoted an increase of almost 600% in the rate over the last year and a half. In March 2021, the SELIC was set at 2% and was multiplied by almost 7 times until the meeting held in August.

The trap of central bank independence

However, the principles underpinning the prevailing model in the COPOM meetings disregard the social and even economic consequences of its decisions. Thus, it is quite likely that we will see a return of pressure for further increases starting at the next meeting, to be held on October 25th and 26th. If the opinion polls are correct, we will already know the future President of the Republic at that time. Lula's likely victory in the first round next Sunday should act as a new variable to be considered by the Committee members. But, unfortunately, this is unlikely to be the path taken by the nine members of the board, who are the directors of the Central Bank themselves.

The assessment that a systematic and continuous increase in the benchmark interest rate would be the only way to counter the most recent inflationary process exemplifies the difficulties the future government will face starting in January 2023. In its current composition, the COPOM (Monetary Policy Committee) does nothing more than corroborate the desires and wishes of the financial sector in our country. Most economists who have not been swayed by the siren song of neoliberal conservatism have long warned against the error of the upward trajectory of the SELIC (benchmark interest rate). The pressure on prices originated fundamentally in the energy and food sectors. Now, these are two typical cases of goods and services whose prices cannot be determined solely by the supply and demand movements of the market, as is the case with banana prices at the end of the market.

In the case of electricity, price adjustments are authorized by the government through the regulatory agency, ANEEL. Regarding petroleum derivatives, adjustments are defined by the "international parity price" policy, also established by the federal government. Increases in the SELIC rate have not resulted in any changes to tariffs or the prices of products such as gasoline, diesel, or cooking gas. If the intention was indeed to mitigate the impact of these price increases on inflation rates, the solution would have been to reduce those rates as well, through government decision.

COPOM (Monetary Policy Committee) is devastating: SELIC (benchmark interest rate) sky-high.

Regarding food, the reasons can also be found in the liberal dismantling carried out by the super-minister of the economy. Paulo Guedes decided to eliminate the instruments that the Brazilian State had possessed for decades to monitor and intervene in agricultural product markets when necessary. This refers to the well-known and strategic policy of regulatory stocks, through the National Supply Company (CONAB), so that the government can act on the supply and demand of food and avoid the risks of shortages due to speculative movements and crises associated with seasonality or unexpected climatic events. 

With the adoption of a "free-for-all" policy in the food sector as well, the public administration is left powerless to intervene and regulate the food market, which becomes subject to price increases in its products. Here too, raising the SELIC rate is insufficient to accommodate the forces seeking some kind of equilibrium. Thus, what we saw was the continued growth of inflation rates despite the impressive upward climb in the benchmark interest rate. The result was the severe maintenance of the recessionary effects caused by monetary tightening, while the phenomenon that was intended to be combated, inflation, remained practically unchanged throughout the period.

This approach to the economic phenomenon goes against the urgent need to resume growth in the pace of activity in general, as well as the implementation of a national development program. For this to become a reality, a monetary policy based on different foundations is necessary, where the SELIC rate is well below its current level. Furthermore, the Central Bank itself needs to act decisively as a supervisory and regulatory body of the financial system. To this end, it is fundamental that it act in an exemplary manner in controlling the "spreads" practiced by financial institutions, as well as in punishing abusive practices associated with fees and other charges for services offered to clients. To this end, the government can also utilize large public banks, such as Banco do Brasil, Caixa Econômica Federal, Banco da Amazônia, Banco do Nordeste, and BNDES.

New government and monetary policy

The approval of the Central Bank's independence, through Complementary Law No. 179 in 2021, created an additional difficulty for the next President of the Republic. Through some provisions introduced into the legislation, the institution's directors now have a fixed 4-year term. Worse still, this mechanism was extended to the current directors. Thus, the next ruler will have to coexist with the members of the agency's management – ​​who are also the members of the COPOM (Monetary Policy Committee) – and who were appointed by the Guedes & Bolsonaro duo. An absurdity!

This means that a highly destructive bomb has been set, at least within the realm of monetary policy, against any attempt to resume a developmental project. This is simply because this type of program presupposes a significant change in the way public investment needs are financed, as well as in the policy of forming financial costs in general within the economy and society. Therefore, the government needs to count on those responsible for monetary policy as partners in this national project, not as adversaries.

However, the fact is that representatives of the financial system and the capitalist elites in general also seem to be realizing the electoral unviability of the third-way adventure. Those who do not intend to gamble once again on the disaster represented by the government of intolerance and genocide have no alternative but to support or accept Lula's election. But they do not do so passively. They exert pressure in every way to obtain some commitment from the former president regarding the maintenance of the essence of Paulo Guedes' economic policy, especially concerning the preservation of fiscal austerity and the commitment to the spending cap policy.

They are working to prevent the future government from proceeding with the repeal of measures that destroy workers' rights, and are presenting trial balloons about names with a conservative profile to fill positions in the economic area starting next January. The mainstream media can barely hide their fears and are resuming their attempts at explicit "lobbying" in favor of a solution that serves to preserve the power of finance. Editorials and articles with a hint of blackmail and a foul aroma of threat abound.

The coalition supporting Lula and Alckmin was named "Brazil of Hope." Broad in its composition, it was formed in an attempt to definitively end the cycle of authoritarian and coup-plotting far-right politics in our country. But it also carries the meaning of recovering lost time, buried dreams, and annihilated rights. Rebuilding everything that has been seriously destroyed over the last four years implies a radical change in the orientation of economic policy. And the future trajectory of the SELIC rate must adapt to this new reality.