Economic labyrinth

Ministry of Finance Building/ Image: Rafa Neddermeyer/ Agência Brasil


When it comes to analyzing and diagnosing what happens with market expectations and moods, it is also necessary to take into account other factors.


I have been suffering from chronic labyrinthitis for a long time, which attacks without warning and puts me out of action (Ménière's Syndrome). In the last few weeks, I have lived in a trance and in an unbalanced world. “Waking up” now, however, I am finding that the disabled labyrinth has impaired my judgment. So I leave you with a question: did a catastrophe happen in the meantime that I was not aware of?

A new war, that is, a new war that has caused the price of energy and food to skyrocket even further; or perhaps a great climate disaster, greater than the one that swallowed our brothers from Rio Grande do Sul; no, a new pandemic, that is, I think it is a new pandemic, and infinitely more devastating, causing shivers, especially in the “market”, which will once again have to put up with a State with no strings attached to spending; or did the NYSE, the Nasdaq, the Shanghai Stock Exchange and the Nikkey make a spectacular reversal and end up in the abyss all together; Or was it nothing like that and what happened was a spike in American inflation to such an extent that the United States is now feeling like Brazil in the 1980s?

Whatever it was, it must have been something apocalyptic, without which it is impossible to explain the sudden change in expectations, scenario, panorama, environment of the Brazilian economy from mid-April to this one at the end of June.

So let's see. About two months ago, inflation expectations were falling and perfectly within the target, expectations about GDP behavior were rising, in unison with what was expected for the year, tax collection was surprising positively steadily, and unemployment continued to fall. The external accounts were showing a scenario that was not as rosy as the previous year, but the market had already priced this in and, in any case, they were not a negative surprise either.

The exchange rate was around R$5,00, sometimes a little below, sometimes a little above, and the Ibovespa B3 continued with an upward trend, almost reaching 130 thousand points. The Focus survey predicted the Selic at the end of the year at 9%, signaling continued downward movement. As a kind of corollary, on May 1st, the famous risk rating agency Moodys, despite not changing the rating of Brazil, changed its outlook from “stable” to “positive”.

On Sunday, June 16th, the Folha de S. Paul It had a (poorly written) main headline: “Brazil has one of the worst performances on the stock exchange and in the currency”. In the article, the information that, among the largest economies in the world, the Brazilian Stock Exchange would have lost an average of 10% since the beginning of the year (around 7%, let's say, from mid-April to now), while the Brazilian currency , hitting R$5,40, was only not in first place on the devaluation podium because the Japanese yen usurped the place. At the meeting on June 19th, the Copom unanimously decided to maintain the Selic at 10,5%.

What is the reason for such a turnaround? Someone will soon say that, externally, the Federal Reserve American has once again postponed the moment to reduce its interest rates. But he had already done this at least twice this year alone, without causing all this commotion. Internally, some will remember, Lula's government changed the 2025 primary result target from an additional 0,5% to zero. But this was also already priced in by the market.

There were not two or three, but several executives from financial institutions stating that the primary result targets would be difficult to execute and that they were already working with worse numbers. Furthermore, this change took place in April and did not alter, for example, Moodys' willingness to improve, in its ranking, the perspective attributed to the Brazilian economy. Then why? The answer is not technical.


When it comes to analyzing and diagnosing what happens with market expectations and moods, it is also necessary to take into account other factors. Theoretically, the Central Bank's decision regarding the level to be set by the interest rate is made through the so-called “reference function”, which states that the main variable influencing inflation expectations is the credibility of monetary policy, which, in turn, it depends viscerally on the interest rate itself.

Translated, what determines the behavior of the monetary authority with regard to setting the basic rate is what it hears from the market, but what it hears from the market depends entirely on what it itself says. Such a perfect marriage not only makes any level of the rate, from the lowest to the highest, “balanced”, even if it turns its back on objective variables, but can also become a collusion against the country.

When the Central Bank's policy is strictly and restrictively limited to achieving certain results in relation to the general price index, abandoning its other tasks (according to its legal diploma, it also needs to ensure growth and employment, just to mention one more of its responsibilities) and listening, to set up its “reference function”, only the market – even more narrowly, only the financial market (not so, for example, in the USA, the ineluctable model of our orthodox), the setting of the rate basic becomes a game of friends, full of self-fulfilling prophecies.

Here, therefore, is the first variable (not of a technical nature) that must be considered: from an institutional point of view, objective conditions have been created for a kind of “autism” in monetary policy, which evidently serves specific interests, especially those of old wealth, transmuted into papers – fictitious capital, an old bearded man would say, which insanely seeks to capture in the future the appreciation that it should be helping to promote in the present with productive applications. But there is more.

Since Complementary Law No. 179, which granted autonomy to the Central Bank, signed with Jair Bolsonaro's criminal fingerprint in February 2021, the situation has become even more complex. Autonomy, in principle a kind of safeguard against “political interests”, always harmful, in the ultra-liberal vision that motivated the proposal and approval of the law, the sacrosanct task of preserving price behavior, autonomy can turn, as we are now witnessing. , a lethal political weapon.

Recalling a certain provincial judge who takes over the Justice department beforehand, arresting the strongest candidate for the election, a Central Bank president who has no shame in accepting a position as Minister of Finance in a possible government run by an opposition candidate could be anything but autonomous. Unworthy of the position he occupies, Campos Neto uses and abuses his power to direct monetary policy against the government, democratically sacred at the polls, which commands the Executive.

And with that we return to the twist – unfounded from a technical point of view. On April 17, while traveling to the USA for an IMF meeting, Campos Neto announced that “there is more uncertainty now than at the last meeting” (???) and that the lack of predictability would hinder the plan adopted by the Copom in March, to continue the downward trend in the Selic rate. As journalist Luis Nassif observed, the banana peel thrown by the president of the Central Bank gave immediate results: the day after his speech, expectations regarding a 0,5% cut in the Selic fell from 79% to 28% .[I]

Less than ten days later Campos Neto strikes again: inflation, he says, at an event in São Paulo, “maintains a downward trend, but expectations are high”[ii] (Note, he admits that inflation is falling…). And as a result, at the next Copom meeting, the cut was 0,25% and not 0,5%, in a split decision.

From then on, favorable expectations for the economy's behavior began to go downhill. Forcing a drop of just 0,25%, instead of the expected 0,5%, at the May 8 meeting, leading to the division of the Copom (those nominated by Lula voted for a 0,5% reduction, those nominated by Jair Bolsonaro voted for a drop of 0,25%), helped accelerate the offensive.

The name of Gabriel Galípolo, current director of monetary policy appointed by Lula's government and considered as the likely successor to Campos Neto as president of the entity, is beginning to be heavily questioned. At the last meeting on June 19, Campos Neto's prophecy was fulfilled, a Copom completely hostage to a voracious and corrosive market, instigated by the president of the country's monetary authority himself, seeks to stop the bleeding of expectations that the BC itself leverages and votes in unison for maintaining the rate. Who would vote against? From a Selic at the end of the year of around 9%, now there is no talk of anything other than maintaining 10,5% until the end of 2024. Mission accomplished.


And the Brazilian economy? Ah, it's fine, thank you. Product and employment continue to surprise, revenue too, external accounts ok, inflation falling... And what does it all matter? Anything. But with expectations contributing to inflate uncertainties and reduce little investment, the bitter environment will also contaminate the real economy.

After three decades serving old wealth, with the Executive increasingly tied up, doing its best to preserve a minimum degree of freedom, with the most reactionary Congress in history maneuvering the darkest interests, it remains to be seen whether there will be a thread of Ariadne to rescue the country from this labyrinth, more sinister than mine, for harboring the extremist Minotaur that continues to devour our hopes.

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




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