BNDES expansion could raise neutral interest to 6% per year, calculates economist

An expansion of the National Bank for Economic and Social Development (BNDES) could raise Brazil’s neutral interest rate by two percentage points to 6%. The expectation is part of a calculation by the institution’s former economic policy director and current head of the macroeconomics area at ASA Investments, Fabio Kanczuk.

The specialist considers that each increase of 1% of the Gross Domestic Product (GDP) in the granting of credit by the development bank leads to an increase of 1.5 percentage points in the neutral interest rate, which is currently estimated at 4% by the Central Bank .

Therefore, if the plans to expand government disbursements go ahead, as President Luiz Inácio Lula da Silva and the president of the institution, Aloizio Mercadante, have been defending, the neutral interest rate would rise by almost 2 percentage points, to 6%.

The neutral interest rate is the one that does not accelerate or decelerate inflation, that is, as the name implies, it is neutral. This means that, when the BC raises the Selic rate to contain inflation, it will always raise the rate above the neutral rate (thus, the higher the neutral rate, the higher the Selic rate, in a scenario of out-of-control inflation).

“If the BNDES is granting subsidized credit at one end, the BC has to make more effort at the other end to reduce demand. So, we are in a moment of combating inflation and the Central Bank has to raise interest rates. However, it has to go up more, because at the other end the BNDES is giving credit and increasing demand”, explains Kanczuk.

The economist says that with a higher neutral interest rate, the Selic rate begins to lose its effectiveness in combating inflation and, as a result, the Central Bank should look to higher rates if it wants the same result.

“The Selic begins to have less effect the higher the neutral interest rate and has the effect of fighting inflation less. If he [o BC] If you want the same effect as before, you will have to raise the Selic rate more. If you want the same effect on the economic slowdown, you will have to raise the Selic rate more. People don’t like interest, but you can’t talk about a good or bad effect. For some people higher neutral interest is fine. It’s bad for the general population.”

Kanczuk reinforces that the current neutral interest rate is hotly debated by economists and there is no consensus on the real number. According to him, many believe that it is higher than the 4% reference used by BC. “Economists say it is between 4.5% and 5%, there is no consensus”.

Brazil already has one of the highest nominal and real interest rates in the world. A ranking produced by the Infinity Asset manager shows that Brazil leads a ranking of 40 economies, with the highest real interest rates, currently at 7.4%. Real interest is the current interest rate minus inflation.

Next, in Mexico the discounted rate of inflation is at 5.5%, in Chile it is 4.7% and in Colombia it is 3%.

challenging driving

A possible rise in neutral interest rates corroborates the assessment of specialists that the monetary policy challenge will remain on the Central Bank’s horizon this year.

Added to this is the international scenario of high interest rates and low growth, uncertainties about imbalances in government accounts and political pressures on the monetary authority.

Another factor that may hinder the fall of interest rates in Brazil is in the United States. The still strong American economy indicates that the Federal Reserve (Fed, BC of the USA) will not change the direction of its monetary policy any time soon.

In a seminar on the subject, José Júlio Senna, director of the Center for Monetary Studies (CEM) at FGV Ibre, stressed this Thursday that, by maintaining its aggressive posture, the Fed would reduce the space for the BC of Brazil to reduce the basic rate Selic (today at 13.75% per year).

“It doesn’t seem like there’s much the BC can do. What is certain is that he will not loosen the monetary policy without a very good justification”, stated Senna.

In Senna’s view, given the signals from the economic team, mainly in the sense of seeking increases in tax collection, the BC may even make adjustments to its “balance of risks”, mentioned in its communiqués, but there are no shortcuts to reduce interest rates. “Nothing replaces a robust fiscal adjustment,” he said.

Even so, there is a growing movement in the market of analysts who expect a drop in the basic rate ahead of schedule, still in the middle of the year.

The expectations and looks that could indicate the beginning of an anticipated fall in the Selic rate turn to what will be the fiscal framework rule that the Ministry of Finance promises to present soon.

Economists assess that the government needs to give clear signs of a goal for controlling the public debt and also for controlling the growth of public spending.

The problem is that there is little optimism with the possibility of the current federal government moving towards an adjustment, whose hopes are deposited in the new framework of fiscal rules to be announced by the Treasury.

For Armando Castelar, also a researcher at FGV Ibre, the economic team’s proposal should be “more of a promise” than “something that ties expenses”. “In the absence of something to hold back spending, the government is trying to increase tax collections,” he said.

Proposal on the TLP

To make the BNDES more competitive, the government intends to present a proposal on the “new” Long Term Rate (TLP), which marks its loans, by April 10th.

For a greater participation of the BNDES, however, the reform of the TLP is considered fundamental. That’s because, today, the rate includes the yields of the NTN-B, a National Treasury bond with a five-year redemption period, plus the monthly variation of the IPCA.

The TLP, in force since 2018 at Banco de Fomento, replaced the TJLP, which was part of a subsidized credit policy at Banco de Fomento, adopted during PT governments. The return of this type of policy is one of the great fears of economists, investors and financial market analysts.

Behind the fear is the soaring public debt in the early 2010s that the billionaire BNDES deficit loans helped to foster, alongside the low effective returns that these credits generated for the economy, as various studies that came after tried to measure .

*With information from Estadão Content.