Central Bank, interest rates and independence – in defense of Lula



What Lula has been claiming is the authority that the Constitution gives him and that he, in practice, does not hold.

after having written Brazil Delivery[1] 20 years ago, I never imagined that I would write an article with the title of this one. I argued there that Lula's macroeconomic policy was more realistic than the king's, deepening the neoliberal principles that had guided the previous government, especially those that prevailed in Fernando Henrique's second term (after the abandonment of the fixed exchange rate and the adoption of the inflation targets).

In fact, Lula had started his first government with a heavy package of measures (raising the Selic rate from 22 to 26%, raising the primary surplus target to 4,25% – when the IMF required it to be 3,5% – and a strong currency which, overnight, via an increase in bank reserve requirements, cut about 10% of the economy's means of payment), then justified by the need to circumvent an alleged lack of monetary control, which threatened to bring back inflation, and yet another external crisis, which was putting the Brazilian economy “on the edge of the precipice”, running the risk of “dissolving like gelatin” or “melting like butter” (these were the most used expressions of the financial market/media partnership at the time).

The truth is that economic terrorism ran rampant throughout 2002, with increasing intensity as the prospects of victory for Lula and the Workers' Party were consolidated. The greatest evidence of this terrorism was the value reached by the dollar at the end of that year, a mark that has not been surpassed until today, if we consider it in real terms. Thus, Lula won, but he didn't take it, in fact, he started to win losing even before the election, when he signed the Letter to Brazilians, the safe-conduct required by the market for the future president to be accepted.

I recall these facts not only because they help us to better understand the turmoil created today by Lula's recurrent claims regarding the Central Bank's actions, but also to show how long the country has been hostage to financial wealth and its imperatives. After a more realistic package than the king, we went through the rest of the decade of the 2000s as world champions in terms of real interest rates, which reached an unbelievable 12% in mid-2005, leaving in its wake the deepening of deindustrialization early in the country. The good image that, even so, Lula's two terms managed to build in the eyes of the population, was due to the social programs with a strong impact that he adopted and to the tree international of commodities that characterized the period.

After the complicated Dilma-coup-Temer-Bolsonaro court, here we are at the same point, with the same explanations as always for once again taking first place in the ranking world of interest payers. By the way, it is interesting to note the behavior sui generis of Bolsonaro's term: the annual averages of the annualized monthly real interest rates of his term were abnormally low for the country's standard, even if we disregard the two years most affected by the pandemic (2020 and 2021):[2] 2,18% for 2019, -0,39% for 2020, -3,21% for 2021 and 3,07% for 2022.[3]

Considering these numbers, it is worth asking why the average will have to rise to 7,5% in 2023 (which is what will happen if the Copom insists on maintaining the Selic target[4] by the end of the year at 13,75%). Why do we have to be world champions without anyone threatening us even close? The country that is in second place has a real rate of just over a third of ours - Mexico with 2,8%. Orthodox economists, market operators and the media that grant them exclusive space repeatedly and tirelessly put on the wheel, the one-note samba called credibility (in this case, for them, the lack of it). The villain of the story this time (since we don't have problems with the external accounts) is the lack of fiscal control, accompanied by the inflationary spike that started in mid-2021.

However, the arguments are fragile: public accounts have been achieving better results (in 2022 a surplus of 1,3% of GDP and a slight decline in the debt/GDP ratio) and inflationary pressures, resulting from completely exogenous factors (Chinese policy that disrupted the global value chains and conflict in Ukraine) seem to be cooling down since the middle of last year. Have interest rates gone up all over the world? It is true, but countries with inflation rates very similar to ours, such as India, South Korea and Canada, have real rates much lower, or even negative (0,7% in India, -1,6% in South Korea and -1,7% in Canada).[5]

Ah, yes, the problem is in expectations, which can “unanchor” if the Selic falls. What is the rationality of this type of argument? We can find it in the so-called “Central Bank reaction function”, stating that the interest rate is the determining factor for the credibility of monetary policy (that is, the degree of belief of agents in the capacity of the Central Bank to keep inflation at values ​​close to the target), which, in turn, influences the agents' inflationary expectations, which come to constitute one of the main determinants of the interest rate itself. Thus, if credibility is high, agents' expectations remain close to the stipulated target, with favorable perspectives regarding the achievement of monetary stability. Otherwise, they “disanchor”, and point to a scenario of uncertainty regarding the monetary control of the economy.

It doesn't take much astuteness to realize that the model is self-referential: interest rates depend on expectations that depend on the interest rate. More importantly, however, this does not constitute an effective explanation of the level at which base rates are at each point in time. It just says that any interest rate that promotes the convergence of expectations in relation to the inflation target is justified. As the expectations presented here are those of the agents that operate in the financial market (Focus Bulletin), it is a case of asking from whom exactly the monetary authority needs to be independent. Evidently, a Central Bank that is passive and submissive to the wishes of the market will set the interest rate at the level that is necessary for agents to feel comfortable and not “disanchor their expectations”.

Those who think they are discussing theory will reply that the conclusion does not hold, because there is another variable in the reaction function: the output gap. It turns out that such a variable is very complex to define, to say the least, as there are several different methods to estimate it and each method produces a different result. Furthermore, as far as is known, this last variable has played only a supporting role in the decisions taken by the Copom, the protagonism remaining even with expectations.

Just like a tantrum child, who only stops screaming and embarrassing his parents when his wishes, however bizarre they may be, are met, market agents are experts at finding arguments to affect expectations, and they do it even better when they don't like the government on duty. And the market doesn't like Lula 3 (seeming to really like Bolsonaro/Guedes). They tolerated the previous Lula, especially when the duo Palocci/Meirelles reigned, and they charged a lot for it.

But Lula 3, insisting on putting social responsibility ahead of everything and still with Haddad in tow at the Farm (imagine, a guy who wrote a book entitled In defense of socialism!)… there’s no way! Selic has to be very high for them to have at least a little comfort. To justify the debacle, they insist, as we have seen, on the fiscal imbalance, which would have been greatly increased with the approval of the “PEC da Transição”, or “PEC da Gastança”, as part of the media preferred to name it. But this is about explicit denialism, as the economist André Lara Resende analyzed in an irreproachable article recently published.[6]

What has been considered so far would already be enough to make an explicit defense of Lula's position in relation to the abusive interest rate currently practiced in Brazil and even in relation to the pertinence of the so-called independence of the Central Bank, formally conquered in February 2021. But we can still add two other arguments. One, of a historical nature, and the other pertinent to the relationship between this autonomy and what stipulates the Constitution of the Country.

The cries of the markets, their operators and their partners in the media has the following reasoning behind it: governments are always prone to spenders and, to that extent, fiscally irresponsible. Therefore, an independent Central Bank imposes itself as a guarantee that the handling of monetary policy will be conducted by strictly “technical” parameters, aiming solely at the pursuit of reduced and stable levels of inflation. History, however, shows the opposite. The monetary authority must function, on the one hand, as the controller of the issuance of currency and as the government's bank, and, on the other hand, as the banks' bank. Which of the two functions is eminently public?

The Bank of England, for example, started as a private bank and made an enormous fortune by financing the public debt of the English State and producing new currency (new capital) on top of these credit assets. It was not, however, its role as issuer of the kingdom's currency that historically placed it as a public entity, but, as a bank of banks, its role as a lender of last resort (lending of last resource), which he was forced to play, not without reluctance, in the commercial and banking crisis that took the British space by storm in the mid-nineteenth century.

Something similar happens in the history of the Bank of France, the Reichsbank and the Federal Reserve,[7] in other words, it is to ensure the stability of the banking system (eminently private, in spite of state-owned banks) that the monetary authority needs to be public, not to function as a government bank and controller of the money supply. The truth of these assertions became evident with the great international financial crisis of 2008 – the quantitative easing say it! Considered, therefore, from this point of view, the question of the “independence” of the Central Bank, an ironclad clause of the orthodoxy/market/media discourse, is a fallacious question.

Finally, a last and important argument in Lula's defense: he is not claiming anything more or less than what is foreseen in the very federal Constitution. Let us ask: according to her, does the Central Bank actually have independence in setting the basic interest rate? We will see that no, which calls into question the constitutionality of the legal device that gives the institution the autonomy it enjoys today.[8]

As jurists teach, our Constitution is directive and has normative force.[9] With regard to the economic order itself, this means: (a) that the constitutional norms determine a state action that takes place in the sense of conforming economic relations capable of seeking the main objective inscribed therein, namely, "to ensure a dignified existence for everyone". , according to the dictates of social justice” (art. 170); (b) that the principles that must be observed in this journey are also stipulated, such as national sovereignty, private property and free competition, but also, and it is necessary to emphasize, the search for full employment; and (c) that the normative force of the Constitution, that is to say, the fact that it is endowed with imperative nature, obliges the observance of these determinations and principles.

That said, it is worth asking: is the Central Bank obeying constitutional norms when it sets the Selic target at an unjustified 13,75% and when it signals that it should maintain the figure throughout 2023? It is known, judging by Lula's last lines, that the interest rate would not remain at this level this year in the absence of Complementary Law n.o. 179, which guaranteed independence[10] of our monetary authority. It is then worth asking another question: does our Constitution harbor the idea of ​​an independent monetary authority? The answer is negative. For the federal Constitution of 1988, independent, in the sense of not having to submit to a higher authority, only the three powers.

The Central Bank is a federal autarchy linked to the Ministry of Finance and, therefore, should respond to it, thus reporting, ultimately, to the President of the Republic. What Lula has been claiming, to the disquiet of the leaders, agents and partners of the financial market, is this authority that the Constitution grants him and that he, in practice, does not have. According to Complementary Law no.o. 179, when setting the Selic target, the Central Bank does not need to respond to anyone. It acts, therefore, as if it were a fourth power.

Observing the set of elements listed so far, the only respectable stance for all those who voted for Lula not only to return fascism to its underworld (be it the basement or the sewer), but also to try once again to put into effect the objective of economic order inscribed in the Constitution – a dignified existence for all – is to defend the president in his crusade against the enormity of the current interest rate and, equally, against the arrogance of the Central Bank, consecrated by the unreasonable law of February 2021.

PS By the way, a manifesto of economists against the current interest rate is available on the internet. Here is the link, for those who want to sign it: https://chng.it/YwRMpdn2.qm

*Leda Maria Paulani is a senior professor at FEA-USP. Author, among other books, of Modernity and economic discourse (Boitempo). [https://amzn.to/3x7mw3t]


BERCOVICI, G. Economic Constitution and Development: a reading from the 1988 Constitution. São Paulo: Malheiros Editores, 2005.

CASALINO, V. and PAULANI, LM Constitution and Independence of the Central Bank. Law and Praxis, vol. 9, number 2, 2018, p. 853-889.

DURAN, CV The legal framework of monetary policy. Sao Paulo: Saraiva, 2013.


[1] I am referring to the article “Brazil Delivery: the economic policy of the Lula government”, which appeared in the October-December 2003 issue of Political Economy Magazine (today Brazilian Journal of Political Economy), on pages 58-73. Afterwards it became a book, published by Boitempo, in 2008, under the title Brasil Delivery: Financial Easement and State of Economic Emergency.

[2] The calculation of monthly real interest rates was carried out using the 12-month accumulated IPCA calculated by the IBGE and the value of the Selic target in effect on the 30th of each month.

[3] Compare this with the averages verified in Lula 1 and Lula 2: around 10% in the first and 6% in the second.

[4] As is known, what the Monetary Policy Committee (Copom) determines periodically is not the rate itself that will pay public securities loaded by agents, but the rate that must be pursued by the Central Bank in its operations during the period of validity of the same. Thus, if we are referring to the values ​​determined by the Copom, it is correct to speak of the Selic target and not simply the Selic. Having made the observation, we will use, for simplification, only Selic.

[5] Data on real interest rates in different countries around the world can be found at: https://clubedospoupadores.com/ranking-juros-reais. The table is updated weekly. Data for India, South Korea and Canada, as well as that for Mexico, which appeared earlier, were obtained on 10/2/2023.

[6] “The fiscal cliff and reality”, Valor Econômico, 7/2/2023.

[7] Duran (2013) observes that modern monetary authorities originated in private banks, which were intended to finance the State in exchange for special prerogatives, such as the monopoly of issuing currency.

[8] The arguments presented hereinafter are developed in Casalino and Paulani, 2018.

[9] See about Bercovici (2005).

[10] We know that in fact what was achieved with Complementary Law n.o. 179 was the formal autonomy of the Central Bank, and not its independence, since the determination of the inflation target is still in the hands of the National Monetary Council (comprised of the Ministries of Planning and Finance, in addition to the Central Bank itself). However, given the weight that the institution has had, including with regard to setting the goal, autonomy and independence become practically synonymous here. See the repercussion that the last statements by the current BC president had in the press in the sense of agreeing to revise the inflation target.

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