O government fiscal package It wasn’t even approved and it seems like it’s already gone down the drain. Only with the increase in interest rates made by the Banco Central last Wednesday (11), 1 percentage pointo debt cost rose by around R$50 billion per yearin one fell swoop. And, if there really are two more doses of this size, as the BC already indicated in the decision statement, the bill reaches R$150 billion. The savings that the government intends to have with the cost-cutting measures total R$70 billion in two years.
This calculation was made by the Central Bank itself, and is contained in a document published on November 29th on tax statistics. According to this study, for every one percentage point increase in the Selic rate, the Gross Debt of the General Government – which includes the federal government, the INSS and state and municipal governments – grows by R$50 billion.
According to ARX’s chief economist, Gabriel Barros, the impact could be even higher. The Central Bank has already said, in the statement of the latest decision, that it can maintain the rate of interest rate hikes for two more meetings. In other words, he practically “contracted” a Selic of 14.25%. But, according to the economist, the market’s expectation is that interest rates will rise a little more, to 15%. If this forecast is confirmed, the cost of the debt could reach R$190 billion per year.
READ MORE: Why interest doesn’t seem to tickle inflation
If we only look at the stock of securities debt, which is the debt financed through the issuance of public bonds from the National Treasury, the impact is R$32.7 billion for each percentage point increase in the Selic. Here, the math is easy: this debt today totals R$6.748 trillion. And, of this total, 48% (or R$3.238 trillion) are post-fixed, that is, they vary along with the Selic. So, using the same logic, the tighter monetary policy alone will generate a fiscal cost of more than R$95 billion per year.
Why does interest rate rise?
But it’s good to remember that the Central Bank raises interest rates because its job is to control inflation. And it was because of the current high inflation and inflation expectations that he chose to accelerate the pace of the Selic increase.
What is worrying is that, according to experts’ projections, public debt is on track to reach a volume equivalent to 90% of GDP by the end of 2026. That’s a lot. This is why investors are looking for safer assets, such as the dollar – which explains the price being above R$6.00. A devalued exchange rate causes inflation to rise. And, without a quick response from the government on public accounts, inflation and interest projections are clearly deteriorating.
This increase in interest rates seems more like a palliative, because it does not solve the central problem of the economy at the moment, which is taxes. But, for the Citi’s chief economist, Leonardo Portothis is the best strategy that the BC can take at this moment, at the risk of losing control of inflation – this is what happened in Brazil in the pre-Real plan period.
“The Central Bank has to do its job even if the problem, in fact, is not its own, at the risk of problems multiplying”, he states.
