By PAULO NOGUEIRA BATISTA JR.*
Lowering interest rates favors growth and favorably affects the distribution of national income and public accounts, but the BC needs to maintain high interest rates to please Patifaria Lima
Will the Brazilian economy continue to grow? It is the question that many ask and that some economists, recklessly, are willing to answer. The fact is that the economy grew something like 3% per year in 2022 and 2023, which represents a certain recovery. Nothing spectacular, true, but it's a start. What matters, however, is whether growth will continue in the coming years. What to expect from 2024 and 2025?
It depends, to a large extent, on the government's economic policy, especially fiscal policy and monetary policy. Economists dedicated to making regular projections are not very optimistic. They entered the year predicting an increase in GDP of just 1,6% in 2024 and 2% in 2025. Mediocre results, if the predictions are confirmed.
Fortunately, we can say that these projections are not very valuable – as we saw in 2022 and 2023, when the economic expansion rates predicted at the beginning of the year were largely exceeded by the observed results. No news. Economists have always demonstrated a chronic inability to identify stable functional relationships and, therefore, to minimally anticipate the future. As Galbraith said, the only function of economic forecasts is to confer a certain respectability on astrology.
And yet, it is worth recognizing that the current pessimism of economists is not entirely unreasonable. It should be noted, firstly, that a sharp slowdown in the Brazilian economy has been underway since the third quarter of 2023. Last year's growth presented vulnerable points. It depended a lot on the primary export sector and household consumption. The manufacturing industry stagnated and gross fixed capital formation fell. The aggregate investment rate, which was already insufficient, fell further, falling below 17%. With such a modest rate of investment and creation of productive capacity, it is difficult to sustain adequate rates of economic growth.
What explains this performance sufferable? One reason, well known to us, is the high interest rate policy systematically practiced by the Central Bank. The monetary authority demonstrates an instinctive and deeply ingrained aversion to anything that might resemble economic growth. At the slightest sign of economic reactivation, signs of concern appear at the Central Bank, which soon begins to move in the opposite direction. And it has, as we know, the highest real interest rates on planet Earth. When they are not the biggest, they are always among the biggest. It is true, there has been a certain decrease in basic interest rates since mid-2023, but it was at a slow pace, leaving real rates high.
This may change. The BC's Monetary Policy Committee, the infamous Copom, now has four members appointed by the Lula government. It is true that there are nine in total and the president continues to be the one appointed by Jair Bolsonaro's government, due to the Central Bank autonomy law granting the institution's command fixed mandates that do not coincide with that of the President of the Republic. In any case, four out of nine is enough to make a difference – unless the new Copom members are content to be mere cows in a nativity scene, bovinely accepting the line defined by the president of the Central Bank. I don't believe it and that's why I risk saying that there is hope.
Especially because the harms of stratospheric interest rates are so many and so evident that we can assume that, sooner or later, a providential light will come down at the Central Bank. The reader has probably heard, probably more than once, the arguments against the high interest rate policy. But it's worth insisting once again, given that Brazilian interest rates are still sky high.
There are three main harms. First, the aforementioned adverse impact on economic growth. With high interest rates and scarce credit, demand for durable consumer goods and, more importantly, the level of investment in new production capacity falls. Why take the risk of venturing into new ventures or expanding existing ones, if the money can be invested in security, liquidity and yielding comfortable interest? In this rentier's paradise called Brazil, it doesn't pay to be a businessman.
Second harm: the high interest rate policy concentrates national income, as what it does is transfer income to those who hold financial assets, that is, to the wealthy minorities. This is an argument that should sensitize hearts and minds in a country like ours, which has always had one of the worst income distributions on the planet. It should, but it doesn't even tickle the illustrious circles of Patifaria Lima. There, the main concern, almost exclusive, repeated ad nauseam, is with the fiscal risk and the imbalance of public accounts.
And, with that, we arrive at the third great harm of high interest rates and, at the same time, a notable contradiction in the speech of the buffoon class (or mob). See, reader, what a curious thing. What is fiscal risk? Basically, the fact that the public deficit generates an expansion of debt that may prove unsustainable. It is therefore recommended to eliminate the primary deficit in the government's accounts, in line with what Minister Fernando Haddad's fiscal framework promises.
The curious thing is that those who announce their concerns about fiscal risk rarely, almost never, refer to the financial component of the public deficit. It is a symptomatic omission, which reflects the interests of Patifaria Lima. The omitted subject is nothing mysterious. The public deficit reflects less the primary deficit than the government's net interest expenditure. This in turn arises from monetary policy. In 2023, for example, it is estimated that the total deficit will have represented around 8,3% of GDP, corresponding to a primary deficit of 1,5% and a net interest expense more than four times greater, of 6,8. XNUMX% of GDP.
Do not lose sight of the fact that the growth of public debt, which so worries market economists, is associated with the total deficit and not just the primary deficit. Therefore, an exclusive or almost exclusive focus on the primary result, that is, on accounts excluding the interest burden, is not justified.
In Brazil, public debt is mainly internal and its cost directly depends on the basic rates set by the Copom. To be considered monetarily responsible for Patifaria Lima, the Central Bank needs to maintain high interest rates. It matters little whether this supposed monetary responsibility conflicts with declared concerns about fiscal responsibility.
In short, lowering interest rates would favor growth and, in addition, would favorably affect the distribution of national income and public accounts. It remains to be seen whether lower interest rates would be enough to guarantee the maintenance of reasonable economic growth over the next two years. Maybe not. Experience suggests that fiscal policy plays an equally or more important role than monetary policy. Private investment depends on public investment; consumption, social transfers.
The most important function of monetary policy in the current situation is perhaps to open space for a more flexible fiscal policy without this being reflected in a worrying growth in public debt. This is where the fiscal framework and its ambitious primary result targets for the next two years come into play: zero deficit in 2024 and surplus in 2025. Targets set, remember, to reassure Patifaria Lima and assuage their distrust towards the Lula government .
We are in this situation. We need a flexible fiscal policy to reverse stagnation. But the current targets run the risk of leading to a contractionary policy, exactly the opposite of what is needed. Ave Patifaria Lima, morituri te salutant – those who are about to die salute you.
*Paulo Nogueira Batista Jr. is an economist. He was vice-president of the New Development Bank, established by the BRICS. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa). [https://amzn.to/44KpUfp]
Extended version of article published in the journal Capital letter, on January 12, 2024.
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