New dose of high interest rates


By Enio Vieira, Luciana Rodrigues and Patricia Eloy, O Globo - 20/01/2005

New year, higher interest rates. At its first meeting in 2005, the Monetary Policy Committee (Copom) of the Central Bank (BC) yesterday raised, for the fifth consecutive time, the basic interest rate of the economy, which went from 17,75% to 18,25% year. With no indication of bias (trend), interest rates should remain stable until the next meeting, on February 15 and 16. The decision put the basic rate at the highest level since 19% in October 2003.

One of the reasons for another interest rate hike is the market estimate for inflation this year. On average, analysts predict that the Broad Consumer Price Index (IPCA, used in government targets) will rise 5,7% in 2005, up from the 5,1% to be pursued by the BC. ? Continuing the process of adjusting the basic interest rate initiated at the September 2004 meeting, the Copom unanimously decided to raise the Selic rate to 18,25% per year, without bias ,? says the meeting statement, which it took two and a half hours.

Brazil's real rate is the highest in the world

With the increase in basic interest rates in Brazil, the real rate (that is, discounting inflation) was consolidated as the highest in the world. Real interest rates went from 11,4% per year in December to 11,9% now, against 9% for Turkey, the second highest rate on the list. The calculations, made by the consultancy GRC Visão, consider the current Selic rate (18,25% per year) and the projection of inflation for the next 12 months. The GRC tracks interest and inflation in 40 rich and emerging countries.

The BC's decision did not surprise market analysts, who took a new interest rate for granted.

? The economy is heated and inflation rates are coming above expectations. How did the government decide that, each year, the country should have lower inflation, is there no way to reach this goal if not by raising interest rates? says Alexandre Póvoa, economist at Banco Modal.

Analysts explain that interest rate hikes only have an effect on the economy with a few months' lag. Even so, they do not see risks, so far, for the economic growth of 2005. Alex Agostini, from GRC Visão, recalls that the last five interest rate increases were gradual. The Selic has risen, since September, 2,25 percentage points, to a rate today at 18,25%.

Paulo Vieira da Cunha, HSBC's chief economist for Latin America in New York, also does not believe that higher interest rates will put a brake on economic growth this year. According to him, the expansion projections between 3,5% and 4% this year already include a higher interest rate, around 18%. Cunha does not believe that higher interest rates inhibit investments:

? This process is more related to the prospect of economic stability than to the Selic rate itself. It would be a fallacy to imagine otherwise. The investments will come.

Póvoa, from Banco Modal, recalls that, despite the interest rate hikes that have occurred since September, the economy has continued to expand. The credit offer, cites Póvoa, was hardly affected, thanks to an expansion of new financing modalities, such as the payroll discount.

Adjustment nearing end, analysts say

For this reason, the economist believes that, in February, the BC may raise the base rate again, by another half a percentage point. Economist Elson Telles, a partner at Fides Asset Management, also predicts a new hike in February, but only by 0,25 percentage point. Telles stressed that the increase in interest rates made yesterday will bring the inflation forecast to something closer to the target of 5,1% pursued by the BC this year.

? Can we be close to the end of this cycle of high interest rates, perhaps with another increase of 0,25 percentage points in February? says.

Alexandre Maia, chief economist at GAP Asset Management, also believes that interest rates are coming to an end:

? The BC has been calibrating the pace of expansion of the economy with what Brazil can effectively grow. And that rate (of growth) should not be higher than 3,5% or 4% this year.

For economist Lauro Vieira de Faria, there was no need to raise interest rates. He cites lower increases in wholesale prices as a sign that there is no risk of uncontrolled inflation. Raising interest rates, he adds, inhibits investments, worsens the profile of the public debt and requires greater government fiscal effort.

Businessmen and trade unionists join the chorus by classifying high as regrettable

Ronaldo D? Ercole

BRASÍLIA and SÃO PAULO. Regrettable, discouraging and a shower of cold water. Thus, businessmen and union leaders reacted to the decision of the Monetary Policy Committee (Copom) to readjust the Selic rate again, by 0,5 percentage point, now at 18,25% per year. The president of the Federation of Industries of the State of São Paulo (Fiesp), Paulo Skaf, accuses the government of not containing its expenses and using the? Interest tax? to take money from society to finance its increase in spending.

Skaf recalled that, from January to November 2004, in relation to the same period in 2003, while the Union's revenue grew 9,9%, expenditures increased 11,7%.

? Did Copom lose an excellent opportunity to stimulate the economy and renew the spirits of those who produce and work towards making 2005 a good year for the economy? said Skaf. ? Not to mention that the high interest rate attracts only speculative capital to the country, causing the dollar to fall and damaging our exports.

For the Center of Industries of the State of São Paulo (Ciesp), Copom is moving in the opposite direction to the recovery of the economy and has used unreliable information to make decisions about interest rates.

? Do we think that the path is dialogue, and that is why Ciesp suggests that the BC check the information and figures on which it is based to increase interest rates with reliable sources from the various productive sectors? said the director of the Economic Department of Fiesp, Boris Tabacof.

Fecomércio-RJ sees loss to investment recovery

The Brazilian Association of Base and Infrastructure Industry (Abdib) considers the escalation of the Selic to be worrying.

? Do monetary authorities need to have a medium-term plan, with alternative measures, to control inflationary signs, without this causing so much dissatisfaction and indecision with consumers and companies in general? said the president of Abdib, Paulo Godoy.

For the president of the Federation of Commerce of the State of Rio de Janeiro (Fecomércio-RJ), Orlando Diniz,? The insistence on the continuous increase in the basic interest of the economy contradicts any proposal for recovery of future investments, necessary for the desired sustained growth of the country ? In a note, Diniz stated that the increase in the IPCA in 2004 was due to external shocks, such as high oil prices, with no inflationary pressure caused by demand in the country.

The president of Fecomércio-SP, Abram Szajmam, classified the new Selic increase as unjustifiable.

The president of the Central Única dos Trabalhadores (CUT), Luiz Marinho, said that it is disheartening to start the year by noting that the economic authorities remain insensitive to the country's real needs.

? By continuing to raise interest rates, does the Copom throw a bucket of cold water at everyone who has long wanted Brazil to have vigorous, long-term economic development, with income distribution and social inclusion? said Marinho. ? More than inflationary targets, the country needs to adopt an economic policy aimed at establishing social goals.

The president of Força Sindical, Paulo Pereira da Silva, Paulinho, said that with the decision of the Copom yesterday the government gives a gift to the speculators and punishes the productive sector:

? This extremely conservative BC revenue puts a brake on sustainable growth, increased production, consumption and job creation.

The increase in Selic was also a mistake in the opinion of Antonio Correa de Lacerda, president of the Brazilian Society for the Study of Transnational Companies and Economic Globalization (Sobeet). For him, interest rates in the country are already very high.

? It was an unnecessary increase, which will have a negative impact on investments in the productive sector and will increase public debt. In addition, will it appreciate the real against the dollar even more, damaging exports? said Lacerda.

CNI: expansion should be smaller in the first quarter

The Federation of Industries of the State of Rio de Janeiro (Firjan) released a note in which it considers that the increase in the rate and the prospect of maintaining it at high levels for a long period impair the continuity of economic growth and inhibit the investment cycle that is taking place. starts in the country.

For the president of the National Confederation of Industry (CNI), Armando Monteiro Neto, the pace of economic growth should drop in the first quarter of this year. After an increase of at least 5% of the Gross Domestic Product (GDP) in 2004, Brazil is expected to have a smaller growth with the five consecutive increases since last September:

? Now it is possible to say that we will have a lower growth in 2005 and even below the estimates, which pointed to growth of around 3,5% to 4%.
COLLABORATED: Fabiana Parajara, from Globo Online, and Valderez Caetano