Brazil: Nobody Is Happy with the Prime

Even though it was expected by the majority of economists,
Brazil's productive sector didn't like the Central Bank's decision
to maintain its high interest rate. The president of the National
Industrial Confederation called the action "frustrating" and
considered that the measure will affect investment decisions.

Alana Gandra

After meeting for nearly three hours, the Brazilian Central Bank's Monetary Policy Committee (Copom) decided unanimously, and for the second straight time this year, to maintain the prime interest rate (Selic) at 16.5 percent per year, without bias. This means that the rate will remain unchanged for the next 30 days.

This time the Copom chose just to announce the rate, without any additional observations on the reasons for the decision. The Bank's justification will be spelled out in the Copom's minutes, which should be released next Thursday (26).

After analyzing the country's macroeconomic indicators, especially the data on inflation, the president of the Bank, Henrique Meirelles, and the other eight Bank directors who form the committee decided not to tamper with the Selic (Sistema Especial de Liquidação e Custódia), Brazil's basic interest rate.

The decision did not surprise the financial market. Most analysts already expected the Selic to be maintained, after the Copom decided last month to interrupt the succession of interest rate cuts. Between May and December, 2003, the Selic was reduced from an annual rate of 26.5 percent to 16.5 percent, a cumulative decline of 10 percent last year alone.

Even though it was expected by the majority of economists, the result did not please the productive sector. The National Industrial Confederation (CNI), for example, regarded the maintenance of the Selic at 16.5 percent as "frustrating." According to CNI president Armando Monteiro Neto, the decision "acts in a negative way on the expectations of economic actors, and this will affect investment decisions."

For Monteiro Neto, the Central Bank overestimated the seasonal and temporary inflationary pressures that occurred at the beginning of the year. According to the CNI, the Brazilian economy has been presenting a picture of improvement—a fall in the Brazil risk premium, an exchange rate with the dollar under R$ 3.00, and expectations that inflation will be under control for the next 12 months. Moreover, the international scenario is "very positive" at the moment, which would justify an interest rate reduction.

Workers Criticize

The Workers' Central Union (CUT) also criticized the Central Bank's decision to hold the prime interest rate at 16.5 percent per year. "Maintaining the same interest rate level as in January means jeopardizing all the growth targets and continuing to sacrifice workers and reward only those who have been getting rich off high interest rates," the note affirms.

The message was directed at the financial system, which, according to the CUT, obtained "astronomical" profits in 2003. In the note the CUT recalls the promise made by President Luiz Inácio Lula da Silva, who referred to the "growth spectacle," growth that is imperiled if the Copom continues to bet conservatively and believe that "the economic indicators show positive results by inertia."

The CUT note begins by labeling the Central Bank's decision as "unbelievable" and concludes by affirming that "it is difficult to believe that the broad public, that is, Brazilian society, will want to continue watching reruns, because it knows that the end isn't a happy one for anybody."

The Union Force, another labor union, issued a note in which it expressed its perplexity over the "Copom's lack of sensitivity when it decided to maintain the prime rate at 16.5 percent."

The labor group criticized the monetary policy that has been "awarding the banking sector with record profits, to the detriment of production and employment."

The decision, according to the Force, does not contribute to the resumption of economic growth. "We deeply regret this tragic decision, which already jeopardizes the first half of 2004 and frustrates popular aspirations for more jobs."

Industry Not Happy

The president of the Paraná Industrial Federation (Fiep), Rocha Loures, called the decision by the Monetary Policy Committee to keep the country's basic interest rate (Selic) unchanged at 16.5 percent annually, "a cold water bath for the economy." Loures added that the government was making it difficult for the economy to reach its own level of activity. "The high interest rate policy represses development," he declared.

Spokesmen for the Rio de Janeiro industrial federation (Firjan) declared that there was room for further reductions in the rate and they were disappointed. A note said there was no danger of a generalized increase in prices and that a window of opportunity had been closed, a window leading to the possibility of renewed growth.

The Rio commercial federation (Fecomercio/RJ) was harsher in its criticism of the Copom decision. "This is not welcome news for an economic segment where sales were down 3.6 percent in 2003. We represent 318,000 firms that employ 1.8 million people. And we can tell you that there is no inflationary pressure due to demand," declared Orlando Diniz, president of the Fecomercio/RJ.

On the other hand, according to the director of variable income at the Banco Santos, Eduardo Fornazier, the Copom decision was expected. But he pointed out that the decision was based on projected rises in the Broad Consumer Price Index (IPCA), which should not be the case in March making it possible to reduce the Selic by 0.25 percentage points at that time (that is, at the next Copom meeting which begins on March 16).

Finally, economist Alberto Furuguem, of the Economic Policy Council at Fecomercio/RJ (Conselho de Política Econômica da Associação Comercial do Rio de Janeiro), said the Copom decision to keep the Selic at 16.5 percent without any further indication of whether it will rise or fall at the next meeting was not a surprise.

Furuguem said the decision was in keeping with average market expectations. "It just shows a conservative positioning of the Central Bank, but it does not rule out further reductions in the future," he declared.

Furuguem pointed out there were no threats of inflation in March or April, with the recent price spike at an end. Therefore, he said, he believed that the Selic should continue to drop in the next few months.

The Fecomercio/RJ economist concluded by saying that in his opinion the great anti-inflationary anchor this year is going to be the exchange rate. He pointed out that the dollar closed out 2003 at less than R$3.00, compared to market estimates of up to R$3.20. He added that the trade surplus had helped keep the dollar down and without pressure from prices there was no reason not to expect further reductions in the interest rate.

Alana Gandra works for Agência Brasil (AB), the official press agency of the Brazilian government. Comments are welcome at lia@radiobras.gov.br