The students of personal trainer Rodrigo Julião (fictitious name) were surprised by a message that arrived via WhatsApp this Thursday morning (28): from January onwards, doing personalized training will cost 8% to 10% more. What was the basis for this readjustment calculation, according to Julião, was the current level of the Selic rate and the accumulated inflation in the period (just to avoid doubt: the IPCA, the country’s official inflation index, rose 3.88% in the year until October, and 4.72% accumulated in the last 12 months.)
Julião’s decision to raise his price – and, above all, the way he made the calculation, based on the Selic, which does not represent a direct cost in his activity – illustrates very well something that the Central Bank has been repeating for a long time: Worsening expectations could lead to more inflation. And this is exactly what explains the financial market’s reaction to the fiscal package announced by the government.
When economic agents – who are nothing more than businesspeople, employees, service providers, consumers and investors – begin to see a worsening of the economic scenario, they will react by raising prices, stopping purchases or postponing investments. And what was just a risk ends up becoming a concrete problem: more inflation and less economic growth. Like self-fulfilling prophecy.
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Want to see another example? App driver João Ribeiro (fictitious name) was scared when he saw the dollar exchange rate hit R$6.00 on the market. day after to the announcement of the fiscal measures announced by the government. And he decided to postpone the decision to buy a new cell phone for his wife as a Christmas gift. His intention was to import the device. And, right in the week of Black Friday, he thought it more prudent to save the money.
The power of expectations
It is the small decisions that individuals and companies make on a daily basis that define the direction of the country’s economy. And these choices are not always objective, calculated based on numbers. They also result from the level of confidence – or insecurity – in what they see for the future.
The potential for the problem becomes even greater if we think that companies – small and large – also react based on expectations. IDB do Brasil, a trading company that works with the import of inputs for the chemical, metal-mechanical and civil construction industries, has seen its clients enter into a “standby” stance and postpone contract closings in recent weeks. This is due to the expectation of the announcement of the government’s fiscal package.
IDB CEO, Erick Isoppo, explains that the rise in the dollar harms importers. Therefore, those who managed pushed forward the decision to buy products from abroad, waiting for some good news that would improve the exchange rate.
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“We saw importers move forward with their business, hoping that things could improve. But there comes a time when they have to close the contract. But they will continue to import, expensive or not, because this higher dollar cost ends up being passed on to the consumer”, explains Isoppo. IDB do Brasil, headquartered in Criciúma, has a portfolio of around 150 clients, located in the states of Santa Catarina, Paraná, Rio Grande do Sul and São Paulo.
Cloudiness
But why are expectations getting worse if unemployment is low and the numbers show that the economy is growing? Because much of this growth is being supported by government spending. And to do this, the government has to raise more money. This option to increase revenue, instead of containing spending, punishes companies and a large part of the population. And it could lead to a lack of control over public accounts. Perfect ingredients for low growth and higher inflation.
This is what explains the fact that the dollar reached R$6.00 this Thursday. And also the rise in future interest rates, which began to project a Selic rate of 14.90% in 2025. What is worsening expectations is that, in investors’ view, the way the government presented its fiscal package shows a certain lack of commitment to putting public accounts in order. More public spending could turn into inflation and, consequently, will make the Selic rise in the future. And then, it’s that story: as no one wants to pay to see, the order is to buy dollars and bet on a rise in interest rates, as a way of protecting themselves.
And, once again, the risk here is that of a self-fulfilling prophecy. If the market sees that the Selic could be close to 15% next year, the investor who finances the government will want to receive a higher interest rate to buy the bonds issued by the National Treasury. And the calculation is simple to understand: if you see your creditor spending more than you can afford, you will be afraid to lend to him again. And one way to say “I won’t lend anymore” is by increasing the interest you will charge. That’s more or less what’s happening.
To be able to roll over the government’s securities debt – which today is around R$7 trillion –, the Treasury has two paths: either it accepts paying higher pre-fixed interest rates, or it sells post-fixed bonds, which fluctuate according to the Selic. In both situations, he will pay more.
And here is a very important detail: if interest rates really rise the way the market is projecting, the cost of debt will skyrocket. It’s just that today, the share of post-fixed securities is at R$3.2 trillion. And every one percentage point more in this account, the annual cost of this debt rises R$32 billion. Practically half of what the government says it should save with the announced package.
Imagine com a Selic a 14%.
