Raising interest rates in the U.S. to contain prices will limit the policy choices of Copom** and impose costs on our economy.
Already under pressure from local inflation, elevated unemployment and high interest rates, the Brazilian worker would still have to shoulder part of the bill for American inflation if the Federal Reserve tightens the game to hold down prices. More expensive credit in the world’s largest economic power has repercussions for other countries, making financing more difficult, affecting the exchange rate and undermining economic activity and employment. This tightening could occur in March, with an increase in basic interest rates currently in the range of 0% to .25% per year. There is already talk in financial markets of an increase of 0.5 percentage points, followed by smaller increases up to the end of the year. However, even a softer start, with an adjustment of 0.25 points, could affect the already weakened Brazilian economy.
That the Fed will tighten its policy is indisputable, as it faces the intensification of an inflationary surge. With an increase of .6% in January, consumer prices reached a level 7.5% higher than the year before, in the greatest change since February 1982. It is no longer possible, say analysts and entrepreneurs in the American market, to maintain the loose and expansionary policy of recent years.
With very low interest rates and a great deal money placed into circulation, this policy facilitated an economic recovery after the initial wave of the pandemic, but with an increase in prices as a collateral effect. The monetary authority had already promised a less expansionistic policy, but the new inflation numbers possibly precipitated a more severe modification.
Any tougher policy in the United States would limit Copom’s choices, as it is already grappling with very serious maladjustments. Monthly inflation declined from .73% in December to .54% the following month, but this rate was the highest for January since 2016, when it reached 1.27%. The rise of prices in 12 months went from 10.06% at the end of 2021 to 10.38%.
According to market estimates, it is unlikely that consumer price increases this year will stay below 5%, the official target ceiling, centered at 3.5%. Today, as last year, a result above the tolerance limit seems more probable. Basic interest rates reached 10.75%. There is already speculation in the market about 12.25% rate in the coming months. The Fed’s next decision might substantiate this bet and possibly stimulate more pessimistic projections. In any case, interest rates will continue to rise in Brazil, even with increases less than the 1.5 percentage points used in the last two adjustments to the basic rate.
By making the operations of the Treasury more expensive, higher interest rates will complicate the management of federal finances, make it harder for business and pose more obstacles to economic growth, for now estimated to be in the range of -0.5 to +0.5 for 2022. It is difficult to imagine an alternative to high interest rates, because the Central Bank of Brazil faces inflation, while the president of the Republic, his “political” ministers and Centrão*** unite in the party of spending and irresponsibility.
*Editor’s Note: The original language version of this article is available through a paid subscription.
**Editor’s Note: Copom stands for the Monetary Policy Committee of Brazil’s Central Bank.
***Translator’s Note: Centrão refers to an informal bloc in the Chamber of Deputies that brings together parliamentarians from center and center-right parties.