Meirelles defends interest rate control.

247 - Former Central Bank president Henrique Meirelles states, in an article published this Sunday (21) in Folha, that "one of the most important issues that Brazil must face in the coming years is the issue of the interest rate". According to him, "its central component is the so-called equilibrium or neutral interest rate, which allows the economy to grow without generating inflation".

He explains that fiscal rigor, the reduction of public debt, monetary policy, and the growing credibility of the Central Bank and the inflation targeting system in the early years of Lula's government "guided inflation expectations around the expected inflation of 4,5%, containing price adjustments." For Meirelles, this "Brazilian experience is unequivocal and clearly shows the way forward."

The path is clear.

One of the most important issues that Brazil must face in the coming years is the issue of interest rates. Its central component is the so-called equilibrium or neutral interest rate. This rate, in theory, allows the economy to grow without generating inflation.

Historical examples help to understand the issue. The United Kingdom experienced an illuminating moment centuries ago when Parliament gained the power to draft the budget. Until then, the king had absolute spending power. To cover deficits, he could tax or borrow at will. The interest rate at that time fluctuated around 14% per year. But, from the moment public spending began to be controlled by the imposition of a conservative Parliament, the rate began to fall. In a few decades, it reached a level of 4% to 5%.

The world is more complex and sophisticated today, and the inflation rate is an important component of the nominal interest rate, in addition to other components of country risk, such as exchange rate and political risk. But the experience of a large number of countries in recent decades, including Brazil, shows a clear path towards lower interest rates in the economy.

Between 2002 and 2003, one-year interest rates in the Brazilian market reached 33%. Meanwhile, the Central Bank's rate (Selic) reached 26,5%, aiming to control inflation that had reached around 12% in 2002 and with expectations in that range for 2003.

Inflation gradually fell to 3,2% in 2006. And, in the six years in which the target was set at 4,5%, from 2005 to 2010, there were three years with inflation below the target and three years above, which means a balanced inflation level around the target.

During that period, the Selic interest rates fell or rose according to monetary cycles, but with a clearly declining trend. The average interest rate fell steadily and kept inflation on target during the period, producing a constant drop in the equilibrium or neutral rate.

This gain was a consequence of fiscal rigor at the beginning of the period mentioned, the decrease in public debt during that period, monetary policy, and the growing credibility of the Central Bank and the inflation targeting system, which guided inflation expectations around the expected inflation of 4,5%, containing price adjustments. There was also a decrease in external risk, with an increase in international reserves. All of this generated a reduction in so-called risk premiums, mainly inflationary, fiscal, and exchange rate risks, which naturally leads to a gradual decrease in interest rates.

Therefore, the Brazilian experience, like that of other countries, is unequivocal and clearly shows the way forward.