Alckmin: fiscal impact of the interest rate is BRL 190 billion

According to Alckmin, in addition to causing damage to economic activity, inhibiting investment and harming trade and industry, this level of interest has a strong impact on the country’s fiscal situation, since a large part of the debt is indexed to the Selic rate.

“Almost half of the Brazilian public debt is sealed (indexed to Selic). So, each 1% of the Selic rate costs R$ 38 billion (in public debt service payments). There is nothing worse for the fiscal issue than an unnecessarily high Selic rate. So, BRL 38 billion for every 1%, if you have a rate 5% above what it should be, that costs practically BRL 190 billion”, he criticized.

“You save a billion, half a billion, and end up spending almost R$ 200 billion because of having a Selic rate at that time”, he added. Alckmin is in the exercise of the Presidency of the Republic this week, during President Luiz Inacio Lula da Silva’s trip to Europe.

Alckmin assessed that the decision of the Monetary Policy Committee (Copom) of the Central Bank was “difficult to understand” in view of the scenario of falling inflation and negative international interest rates.

“The world today has negative interest rates, inflation is falling, there is a deflation in the IGP (General Price Index), in 12 months, of more than 6%. Future interest rates are falling and this Selic rate ends up having a fiscal impact. If the worry is debt, there’s nothing worse than that,” she added.

After rising at the beginning of the year, inflation expectations have fallen. According to latest Focus bulletinthe inflation estimate for 2023 increased from 5.42% to 5.12%.

In May, driven by the drop in the prices of fuel and household items, the IPCA fell to 0.23%, according to the Brazilian Institute of Geography and Statistics (IBGE). With the result, the indicator accumulated a rise of 2.95% in the year and 3.94% in the last 12 months, a lower percentage than the 4.18% accumulated up to the previous month.

Alckmin also noted that, even under the management of Roberto Campos Neto at the head of the Central Bank, the Selic rate was reduced to 2% per year, the lowest level in the historical series, and with higher inflation than the current one. Because of the economic contraction generated by the covid-19 pandemic, the Central Bank had dropped the rate to stimulate production and consumption. The rate was at the lowest level in history from August 2020 to March 2021.

Taxa Selic

The basic interest rate is used in the negotiation of public securities issued by the National Treasury in the Special System for Liquidation and Custody (Selic) and serves as a reference for other rates in the economy. It is the Central Bank’s main instrument for keeping inflation under control. The BC acts daily through open market operations – buying and selling federal public bonds – to keep the interest rate close to the value defined at the meeting.

When the Copom raises the basic interest rate, the purpose is to contain heated demand, and this affects prices because higher interest rates make credit more expensive and stimulate savings. Thus, higher rates can also make it harder for the economy to expand. But, in addition to the Selic, banks consider other factors when defining the interest charged from consumers, such as the risk of default, profit and administrative expenses.

By reducing the Selic rate, the tendency is for credit to become cheaper, encouraging production and consumption, reducing inflation control and stimulating economic activity.