One of my students insulted my intelligence by saying I think like Brazil’s president Lula who doesn’t understand how measurements are taken to reach the country’s interest rate set by the Central Bank’s committee.
No name, no blame, but I will say she’s a Financial Director, so clearly someone who has received a high level of knowledge about the subject of economic stability.
Brazil’s Central Bank has kept the rate at 13.75% since August 2022. Nine top bras directors including the Central Bank’s president, Roberto Campos Neto have decided to hold this basic interest rate though Lula thinks it is too high to stimulate commerce. Incidentally, if you were unaware, R. C. Neto was given the job by the previous Brazilian president, Jair Bolsonaro in 2019. He worked in the banking sector for many years having previously worked for Santander, a bank that originates from Spain.
In my previous blog some observations on “Economic Misconceptions” gave my understanding of mitigating circumstances that affect inflation. And according to worldwide sources, augmenting the basic interest rate reduces inflation, as noted in my blog.
So, you might ask, well why is it so high in Brazil. Well, truth be known Brazil has a history of elevated rates which was encouraged during military dictatorship. Brazilian economists say there is a calculation to get to the right interest rate, but something tells me cuckoo land.
According to online information from a reputable source, “The Central Bank uses open market operations to keep the Selic rate close to the target, injecting or withdrawing liquidity from the banking system. Historical data shows that the Selic differential for the target has remained systematically negative, at levels compatible with the monetary policy objectives. Not sure if Paulo Guedes had any input on this.
The Selic, or Selic Rate, is the economy's basic interest rate. Every 45 days, it becomes news all over Brazil, either because it increased, decreased or remained stable after the Copom meeting, the Monetary Policy Committee of the Central Bank. In May 2023, for example, the Selic remained at 13.75% per annum.
Have the banks got their foot in the pie is an interesting point, or is it the government who set the tone, or is it in accordance to the Copom committee from the Central Bank with their own agenda. Clearly, we can keep Lula out of the equation, as we know he wants to adjust and lower it, whereby the Central Bank are not altogether transparent. Banks prefer elevated interest rates because it allows them to charge higher interest rates on loans. Or perhaps Mr. Neto is subservient to Jair and Paulo who might be thinking about reelection in 2026.
The idea, as they say is to reduce borrowing which could make sense, as firms realize high interest rates make it too costly to repay loans. Won’t that block growth? Then smaller borrowers often take the risk, as they are either desperate to borrow money to survive, or because they are fed up with waiting to buy attractive items like cars or motorcycles which seem unreachable to purchase by trying to save up enough cash.
Banks are aware of psychological persuasion. Persuasion is used to describe a process where a person, brand, or other factors influence another person's behavior or attitude. Bear in mind that persuasion doesn't happen under duress; it's more a form of negotiating or influencing. The thing is, when you want something, you have to weigh up the odds of when to buy it.
Although the ideal situation is being in a position of absolute comfort before making a decision, banks know only too well that emotional desire can often get the better of you. So even though the interest rate is high which makes the repayments expensive, the craving to purchase that dream stealer asset is too much. Dream stealers are people who make it harder to achieve your dreams. Banks make it easier!
The central bank is linked directly to banks and their operations, so that alone tells you they are on the same wave length in reaching Monetary Policy Committee approval. I’m yet to understand the actual mechanics of arriving at such a high interest rate although according to my research the Selic is linked directly to the IPCA.
Consumer price index (IPCA) is used to observe inflation trends. It is calculated based on the average price needed to buy a set of consumer goods and services in a country, compared to previous periods. The yearly IPCA in 2022 closed at 5.79%, lower than 2021 which registered 10.06%. Another reason that clarifies the elevated base interest rate.
The IPCA-15 stood at 0.57% in April 2023, after registering an increase of 0.69% in March, according to IBGE data. In February, the index was 0.76%, compared to 0.55% in January. In the last 12 months, the IPCA-15 accumulates an increase of 4.16%.
In the chart below you can observe a decrease justly leading up to the elections when ex-president of Brazil decreased petrol prices by not charging value added tax (ICMS).
September/2022 -0.29 7.17
August/2022 -0.36 8.73
July/2022 -0.68 10.07
Interest rates and inflation tend to move in the same direction – when inflation is increasing, banks will increase interest rates to encourage people to spend less and save more. In theory, this should reduce demand for goods and services, which helps to contain inflation. However, according to Brazilian inflation it is going down, so therefore why isn’t the interest rate going down?
Surely, by encouraging people to spend it creates more buying which means more sales. More sales mean restoking of merchandise, and consequently more production. More production means more productivity, more jobs, and more robust businesses which all contribute to increased Gross Domestic Product (GDP). This index strengthens countries economic outlook, and moreover, the country as a whole gets on the road to economic recovery, people are happier, and turnover is healthier.
My thoughts which are against some economists’ opinion; when prices come down more people are more likely to buy, and then if more buy others will follow. This encourages sales and demand. When there are more sales there is more production which from a manufacturer’s viewpoint facilitates overheads and cost per item to produce. It is better to have a machine running that is more productive than a machine churning out less while costing more per item to be produced.
Also, to be considered is manufacturing more ends up costing less, as raw material becomes cheaper to purchase for factories (buying power). There is more employment which helps unemployment results; making an economy stronger, reducing poverty, and improving circumstances for a nation to grow, contrary to living in a state of turmoil.
Since arriving in Brazil in the late 80s the economy has managed to hold many people down. Take credit cards as an example. I’ve always felt that the rich get richer, and the poor get poorer; that people are too opinionated, and that there is too much bureaucracy for seamless flow. Then when you consider other countries base interest rate against their inflation levels it makes you wonder!
An example is the European Central Bank that has raised its interest rate to 3.25% as the inflation rate rose from 6.9% in March to 7% in April. In the UK the base interest rate increased to 4.25%. Britain suffered an average 9.1% inflation in 2022, but now it is expected to be reduced to 6.1% in 2023. Oh hold on a minute, how is that possible with such a low interest rate compared to Brazil's 13.75%? It just goes to show that perhaps the Brazilian population is suffering unnecessarily.
The USA’s Federal Reserve increased its key interest rate by 0.25 percentage points, its 10th hike in 14 months. That pushed its benchmark rate to between 5% and 5.25%, up from near zero in March 2022, although the Fed hinted the rise may be its last one for now. Inflation is currently 4.93%. It stood at 8.26% a year ago, but they have got it under control and are pushing to maintain its long-term average of 3.28%.
I’m not an economist, neither have credentials of academic brilliance, but am down to earth, so my question is why is this blog called Legal Theft?
Have a terrific day!
Prof. Carl Boniface
Vocabulary builder:
Top bras (idiom) = business English for the most important people in an organization: The top brass also received benefits not given to the average employee.
Mitigating (adj) = justifying, extenuating, modifying, qualifying, moderating
Cuckoo land (n) = a state of absurdly, over-optimistic fantasy or an unrealistically idealistic state of mind where everything appears to be perfect.
Duress (n) = pressure, force, threat, coercion, compulsion, constraint, (ant) persuasion
Craving (n) = longing, desire, hunger, passion, thirst, yearning, appetite, (ant) dislike
Dream stealers = are people who want to stop you, or put the break on your progress. Dream stealers are people who make it harder to achieve your dreams.
Churning out (phrasal verb) = to produce large amounts of something quickly, usually something of low quality: The factory churns out thousands of pairs of these shoes every week. She churns out a new best-selling novel every year.
State of turmoil (n) = a state or condition of extreme confusion, agitation, or commotion
Seamless flow (n) = something that has no breaks or gaps in it or which continues without stopping
Benchmark (n) = standard, yardstick, level, target, scale, point of reference, bench mark
Down to earth (adj) = with no illusions or pretensions; practical and realistic. "A down-to-earth view of marriage."