Unlike Argentina: due to the sharp drop in inflation, Brazil starts to cut interest rates

As expected for several months, when inflation in Brazil began to show clear signs of a downward adjustment, the Committee on Monetary Policy (COPOM) of the Central Bank of that country decided yesterday to cut, for the first time in three years, the monetary rate policy. .

The half-point cut, which left the benchmark interest rate at 13.25 percent a year, was higher than expected amid strong tensions between the policy wing of Luiz Inacio “Lula” Da Silva’s government and the monetary authority led by Roberto Campos Neto, whom the Workers’ Party (PT) accuses of “sabotaging the economic development” of the country.

The debate about the level of the interest rate and its impact on the growth of the economy allows us to find points of contact with a similar debate that arises among industrialists in Argentina and the reluctance of the government to maintain positive interest rates despite the repeated claim of the Monetary Fund. The context in which they occur, however, marks a huge contrast between the two countries.

While Argentina’s economy is unable to set price anchors, with negative net reserves, a depreciating official exchange rate, relative price distortions and inflation that resumed its upward trend in July and is on track to exceed 120% in the coming months, The Central Bank of Brazil cut interest rates after recording ever-lower inflation rates, even negative. That was in June, the latest data available, when prices fell 0.1%, the lowest level in three years.

In this context, a reality at the opposite of what is happening in the local economy, the Brazilian COPOM started what is expected to be a round of monetary policy easing, as President Lula insisted.

As the entity estimates, “the improvement in the inflation picture” created the “necessary confidence to start a gradual monetary easing cycle”. However, the decision left the government itself unhappy, where it deemed the cut insufficient to promote credit for consumption and investment. That claim ran counter to market expectations, which had expected a drop of just a quarter of a point. What is certain is that Brazil’s benchmark interest rate is, after the cut, plus 10 percentage points higher than inflation, which stands at 3.16% in annual terms.

“The half-point reduction in the Selic rate does not change the fact that the Central Bank continues to impose the highest interest rate on the planet in Brazil. He should have reduced Selic significantly a long time ago.” complained the federal parliamentarian and president of the PT, Hoffman blues. “We are paying a very high price for Bolsonaro Campos Neto’s political activities. He kept interest rates in the stratosphere despite all signs that they were poisoning the economy. The Central Bank of Bolsonaro, Guedes and Campos Neto, defeated by Lula at the polls, is sabotaging the country’s development. They must be held accountable,” he charged.

On the contrary, the Minister of Finance himself, Fernando Haddad, He celebrated the decision, which he considered the product of a “purely technical dialogue”.

In any case, the measure of the Central Bank of Brazil comes days after the Chile, also based on encouraging evidence of low inflation, imposed a rate cut of 1 point. I had already done the same Uruguay and now we await his decision Mexico, scheduled for next week. In this group of Latin American economies that manage to turn the inflation arm and begin to loosen tight monetary policies even before the developed countries, Argentina is out of place, which, although it has rates above 100% per annum in effective terms, they fail to keep above inflation.

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