By MAURO LOPES*

The passive and active complicity of the Lula government with the rates set by the Central Bank

The relationship between the Lula government and the Central Bank in this little over a year and ten months has been publicly marked by the President of the Republic's harsh criticism of the Central Bank's chairman, Roberto Campos Neto. Lula has made dozens of attacks on interest rates and directly on Campos Neto. This has been the most visible and strident aspect of the relationship. There is another aspect, which is kept out of the public eye: the passive and active complicity of the Lula government with the rates set by the Central Bank.

The irrefutable fact is that the Finance and Planning Ministers had and still have the power to change the Central Bank's definition of interest rates. However, in almost two years of Lula's government, they have done nothing and, worse, have been complicit in the rates that are devastating the country. This may seem like an aggressive statement against Lula's economic team. I ask for calm, before the hot-headed ones start throwing stones. I will explain, I hope in a rational and understandable way.

Central Bank, Copom and Selic

The Central Bank is responsible for setting the Selic rate. What is it? According to the Central Bank itself, on your site: “The Selic rate is the basic interest rate of the economy, which influences other interest rates in the country, such as loan, financing and financial investment rates. The definition of the Selic rate is the main monetary policy instrument used by the Central Bank (BC) to control inflation.” Increases in the basic interest rate always aim to promote a contraction in demand by making credit more expensive and cooling economic activity.

Pretty easy, right?

How is it established?

Once again, I leave it up to the BC itself: “The Monetary Policy Committee (Copom) is the body of the Central Bank, formed by its President and directors, which sets the basic interest rate for the economy – the Selic – every 45 days”. The meetings last two days (always on Tuesdays and Wednesdays) and, on the second day, after the markets (stock exchange, foreign exchange) close, the decision is published on the BC website. A brief note explaining the decision accompanies the announcement and, on the following Tuesday, the minutes are published, detailing the summary text contained in the note.

For economists and journalists who follow the economy, so far I have only been stating the obvious. But you are not obligated to know how this process works in detail. We are on the same page now.

Inflation, the main determinant of Selic

Although the Selic rate is defined based on Copom's analysis of the national and international macroeconomic scenario, the determining factor in the decision is inflation.

Let us take the latest Copom Minutes, from its 266th meeting (on November 5 and 6). The numbers are undeniable. No word appears in the text as often as “inflation”: 42 times. The word “fiscal” only nine times. “Exchange rate” no more than five times.

It is not just a quantitative presence. Reading the Minutes shows how the topic is, in fact, the focus of the meetings.

In the section dedicated to “scenarios and risk analyses” (item 15), inflation is the main concern of the BC directors: “The unanchoring of inflation expectations is a common cause of discomfort for all members of the Committee. Re-anchoring expectations is an essential element to ensure that inflation converges to the target at the lowest possible cost in terms of activity”. The text reinforces that monetary policy (the definition of the interest rate) “is a fundamental factor for re-anchoring expectations” and ensures that Copom “will continue to make decisions that safeguard credibility and reflect the fundamental role of expectations in the dynamics of inflation”. At the end of the paragraph, a threat: “A further deterioration in expectations could lead to an extension of the monetary policy tightening cycle”. In other words, Faria Lima’s pressure game (“expectations”, in Copom’s view) could determine scorching rates for a long period. 

When presenting the reasons for the half-point increase in the rate in November, from 10,75% to 11,25% per year, the committee once again indicated that inflation is the crucial variable in the meetings (item 22): “The pace of future adjustments in the interest rate and the total magnitude of the monetary tightening cycle will be dictated by the firm commitment to convergence of inflation to the target and will depend on the evolution of inflation dynamics”.

I believe it is clear that the issue of “inflation” is at the heart of Copom’s decisions on the Selic rate.

The CMN defines the inflation target

This brief description raises an obvious question: if inflation is the central theme of Copom, who tells the committee whether the index is high or low, whether it is acceptable or dangerous to economic activity?

The Central Bank itself explains. Again, I use the institution website: “Copom’s decisions are taken with the aim of ensuring that inflation measured by the IPCA is in line with the target defined by the CMN”.

The text is clear: it is the National Monetary Council (CMN) that establishes the annual inflation target that becomes a guide for Copom's decisions regarding the Selic rate.

In the logic of the CMN-BC-Copom system, this inflation target is the reference for the Selic rate. If current inflation (and “market expectations”) are in line with or below the CMN target, there is no need for a contractionary monetary policy. In other words, there is no reason to raise the Selic rate. On the contrary, there may be a reason to reduce it.

Well, who are the members of the CMN?

Here everything becomes clear and unraveled. There are three members: the Minister of Finance (Fernando Haddad), the Minister of Planning (Simone Tebet) and the president of the Central Bank (Roberto Campos Neto and, soon, Gabriel Galípolo).

Therefore, since January 1, 2023, the Lula III government has had a majority in the CMN.

Detail: unlike Copom, which meets every 45 days, CMN has monthly meetings and can hold extraordinary meetings at any time.

What is the inflation target set by the Council? The target for 2023 was 3,25%, set by the CMN under the Bolsonaro government (Paulo Guedes plus Campos Neto and Waldery Rodrigues, then special secretary of Finance at the Ministry of Economy).

Throughout 2023, Haddad and Tebet had 12 meetings to modify this target, raising it, for example, to 4% or 5% and, with that, relieve pressure from Faria Lima and dismantle the neoliberal logic of Copom (if you like, read a CMN minutes -I selected the one from the February 2023 meeting).

Brazil ended 2023 below the top of the inflation target, with 4,62% (the top of the target was 5,75%), below Mexico (4,7%) and three of its BRICS partners, Russia (7,7%), India (5,7%) and South Africa (5,5%), and not far from, for example, Canada and Germany (3,9%), France (3,6%) or the USA (3,4%).

But, what? Haddad and Tebet, in agreement with Campos Neto, took care to demonstrate strict alignment with financial capital and the Selic rate in 2023 remained above 13%, falling in December to a still scandalous level of 11,25%. They were able to defuse the “Copom-Faria Lima logic” bomb. But they chose to maintain it.

Even worse: in June 2023, in a declaration of total submission to the dictates of the market, Haddad and Tebet announced a goal even tighter for 2024: 3%. Not content, they set the same target for 2025 and 2026.

The two ministers could have raised the official inflation target, placing the center at something between 4% and 5%. By doing so, they undermined the power of pressure and the argumentative logic of financial capital. However, instead of canceling this instrument, which allows the Copom-Faria Lima alliance to maintain the enormous interest rates and the already trillion-dollar interest payments on public debt securities, they handed the knife and cheese into their hands, once again.

The country, due to the direct responsibility of Haddad and Tebet, will continue to be at the mercy of interest rates that are a favorite among billionaires, millionaires, the very rich and the wealthy.

I think you get the idea, right?

Two questions to close this article

1. The country followed in 2023 and a little less in 2024 the heavy artillery of President Lula on Campos Neto, accusing him of being largely responsible for the scorching Selic rate. Come on, as the old saying goes, if Haddad and Tebet are his ministers and owe him obedience, why didn't the president order them to change the inflation target at the Copom meetings, disarming the Copom-Faria Lima logic? Obviously the president of the Republic is not a novice in this matter and knows well how the process of defining the interest rate operates in the CMN-BC relationship.

2. Starting in January, the president of the Central Bank will be Galípolo, Lula's chosen one. Will he or won't he immediately drop the Selic rate?

*Mauro Lopes is a journalist.

PS: so that you don't think that the text above is just the ramblings of an impertinent journalist, it's worth reading the article “Open letter to the National Monetary Council” published in Folha de S. Paul on October 15. The authors, a group composed of some of the most respected economists in the country, cannot be accused of impertinence: Luiz Gonzaga Belluzzo, Carmem Feijó, Demian Fiocca, Fernando Ferrari Filho, Gilberto Tadeu Lima, Leda Paulani, Lena Lavinas, Luiz Fernando de Paula and Nelson Marconi. They propose that, immediately, “the inflation target be changed from 3% to 4%, in order to allow a more balanced growth of the Brazilian economy”. They do not mention Haddad and Tebet in the text because, after all, they are polite economists and not impertinent journalists.

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