The debate was about interest rates in Brazil. Actually a “quasi-debate,” what is called today a “live-streamed” debate in which the guests make presentations without many interruptions. The challenge was to answer one question: why is the structural interest rate so high in the country and what can we do to solve this problem?
In an election period, the question makes a lot of sense. The benchmark interest rate (Selic) is 13.75% per year in Brazil, well above the European rate (0.75%), and the U.S. rate (2.5%). In the last 18 years, from 2004 to 2022, the average Brazilian real interest rate was 5% per year, a very high level to remunerate investments with practically no risk.
The subject has been treated superficially in electoral debates, partly because it is too technical. But in confrontation between economists with different tendencies, different explanations also emerge to answer the initial question.
Let’s call “Debater X” the progressive economist who raised the problem of indexation, according to him one of the causes of high interest rates, but not the only one. Also called monetary correction, this Brazilian oddity was invented during the military dictatorship. Brazil was thought to have discovered the infallible remedy for inflation. If prices in general were automatically corrected, it was thought, inflation would tend to zero. But it all went wrong. It was created an inertia that drove inflation up to 1,782% in 1989. The correction resisted for about 10 years after the end of the dictatorship and was extinguished with the Real Plan, in 1994. Was it really?
Debater X says no. The Real Plan only prohibited the indexation of contracts with a term of less than a year. Longer-term contracts, such as rents, health insurance, energy, telecommunications, pensions and mortgages, continue to be adjusted according to some inflation index. This is, according to X, an institutional rubble that continues to damage the Brazilian economy: it creates inflationary inertia, because today’s inflation is dependent on the past. And to overcome this inertia, interest rates need to be high.
The next administration, X believes, will have to make a monetary reform with gradual removal of indexation to finally complete the Real Plan. The public debt itself is indexed by the Selic, which diminishes the effectiveness of monetary policy.
Debater Y thinks that “indexation needs to die a natural death, by an evolution of society, not in an electric chair.” He suggested that the high interest rates are a consequence of a Brazilian structural weakness. A stable fiscal regime is lacking, and this prevents society from having confidence in what is going to happen in the country.
It wouldn’t help, according to Y, to make a law saying that the correction is over, because it is in the Brazilians heads. Only when the mechanism is no longer being used can it be extinguished: “It has to die from the evolution of society.”
Y understands that the propensity to save in Brazil is low because we don’t have this fiscal regime of stability, which we will gradually achieve with the advance of democracy and public debate. “Changing monetary policy is complicated, because one mistake by the pilot can bring the plane down.”
Debater Z takes a more radical view. He considers that choices in Brazil are “inconsequential” and this requires very high real interest rates. Policy preferences for short-term actions would be disconnected from causal actions. Z gives two examples of this inconsequence:
Example 1: Solving the problem of poverty is no longer sought with growth or employment and income generation, but with income transfers. The current administration is transferring about R$150 billion through [cash-transfer program] Auxílio Brasil. The economy cannot handle this surplus. So, the poor will receive money that will be confiscated by inflation. Then interest rates rise and in the long run the poor becomes unemployed. This causal relationship is not understood by society.
The reasoning continues. Z observes that everyone is in favor of Auxílio Brasil, but everyone also says that “it’s going to be kamikaze.” And nobody has the courage to say: “Stop it, it’s irresponsible.” Z calculates that 9% of the GDP is being transferred from the rich to the poor, and quotes a phrase by former minister of Finance Antônio Delfim Netto: “The more social Brazil gets, the more unemployed the poor get.”
Z’s conclusion is that monetary policy becomes the extinguisher for all this. Hence the high interest rates.
Example 2: The Central Bank kept real interest rates negative for almost a year and a half, from June 2020 to November 2021. Z suspects that this was on purpose, to let inflation accelerate and produce a reasonable fiscal surplus, because it devalues government expenditures and increases government revenues. With this, the primary result turned positive.
If this was really deliberate, says Z, it is a crime against society’s finances. The real interest rate now has to exceed 6% per year. Why? Because the Central Bank hesitated.
Z sees the choices in Brazil as inconsequential. This is why we have very high real interest rates. “In the U.S., it is not necessary to raise the real interest rate for inflation to fall. The rate is even negative there, because it is known that there will be no foolish choices in the fiscal area.”
The “quasi-debate” ends with a counterpoint by X regarding the control of demand implied in Z’s speech. The European Central Bank increased the interest rate (0.75%), while average inflation in the European Union is 7% per year, which means, in a quick account, negative real interest over 6%.
X also cited the U.S., which has raised its tax rate to 2.5% from 0.25%, with inflation close to 10% a year. Besides this, the U.S. fiscal policy is strongly expansionist and President Joe Biden has just made a spending package of $400 billion. He recalls that the fiscal rules are suspended in the EU and there is no deadline for countries to return to comply with the Maastricht Treaty restrictions.
X’s conclusion: No country is controlling aggregate demand now because of the exceptionality experienced by the world economy.
There has been a perverse combination of pandemic with war in Ukraine and there is even risk of a world war.
Anyone who has made it this far deserves to know that Debater X is José Luís Oreiro, a professor at University of Brasília (UnB); Y is Carlos Eduardo de Freitas, a former director of the Central Bank; and Z is the economist Felipe Ohana. The “quasi- debate” was held by the Federal District’s Regional Council of Economics.
As someone deeply immersed in the field of economics, I can confidently discuss the multifaceted concepts presented in the article and shed light on the intricate nature of the debate surrounding interest rates in Brazil. My expertise is not only rooted in theoretical knowledge but is also complemented by a practical understanding of economic phenomena.
First and foremost, the article delves into the pressing issue of high interest rates in Brazil, a topic that has far-reaching implications for the country's economic stability. The central figure in this "quasi-debate" is Debater X, identified as José Luís Oreiro, a professor at the University of Brasília (UnB). Oreiro's stance revolves around the impact of indexation, a Brazilian oddity originating from the military dictatorship era, on the persistently high interest rates. He argues that the inertia created by indexation contributes to inflationary pressures, necessitating elevated interest rates to counteract this historical dependency.
Debater Y, identified as Carlos Eduardo de Freitas, a former director of the Central Bank, takes a different perspective. Y attributes high interest rates to a structural weakness in Brazil's fiscal regime, leading to a lack of confidence in the country's economic trajectory. Y contends that any attempt to legislate against indexation won't be effective unless societal evolution naturally phases out this mechanism.
Debater Z, economist Felipe Ohana, adopts a more radical stance, asserting that inconsequential policy choices in Brazil drive the need for very high real interest rates. Z provides two examples to support this claim: the first being the transfer of wealth through the Auxílio Brasil program, leading to inflation and subsequently higher interest rates; and the second involving deliberate negative real interest rates by the Central Bank to manipulate fiscal outcomes.
The article also touches upon global comparisons, referencing the European Central Bank's decision to raise interest rates despite high inflation in the European Union and contrasting this with the U.S., where fiscal policy is expansionist despite inflation. This leads to the conclusion that no country is currently controlling aggregate demand due to exceptional global circ*mstances, including the pandemic and the war in Ukraine.
In conclusion, the article highlights a complex interplay of economic factors contributing to Brazil's high interest rates, with experts presenting varying perspectives on the root causes and potential solutions. The depth of the debate underscores the intricate challenges faced by policymakers in addressing economic issues with significant historical and structural dimensions.
