Brazil to see lower interest rates only in 2023; stagflation cannot be ruled out

RIO DE JANEIRO, BRAZIL – Let there be no illusions. Brazil seems to be heading towards the worst of all worlds: stagflation. Not a popular term, it combines low economic growth and high inflation. Brazil is familiar with both.

And, for the time being, there is no sign of respite in the price escalation which has well-known and serious consequences: it destroys the population’s purchasing power; the expectation of product and service sales by companies, with an impact on production; and reduces points in the Gross Domestic Product (GDP). In order to tame inflation, the Central Bank is tightening interest rates. And it is not going to stop.

In the minutes of its last meeting, published on Tuesday (28), the Monetary Policy Committee (COPOM) reiterates its indication for an increase of another percentage point in the SELIC in October. Currently at 6.25% a year, the rate will increase to 7.25%. In December, the interest rate will reach 8.25%. And there is more.

COPOM went further and announced that inflation projections suggest an interest rate trajectory of 8.50% in 2022 and a reduction to 6.75% in 2023.

Under these conditions – and with the dollar at R$5.252 – inflation will stand at around 8.5% in 2021, 3.7% in 2022 and 3.2% in the following year, according to the committee, which also foresees a robust upturn in activity in the second half of the year with the effect of Covid-19 vaccination; recovery of the job market, albeit still below the pre-pandemic level; and high fiscal risks implying an “upward bias” for inflation.

CONTRACTIONIST IN SPEECH AND PRACTICE

The semantic balance of COPOM’s minutes is always telling. The command of the Central Bank is emphatic as to the risks of inflation and the contractionary power of monetary policy.

“Contractionist” is a word repeated 5 times in the text, compared to 2 times in August. “Risk” was given 10 warnings, compared to 12 in the previous document. “Inertia” – which debuted with 1 mention in August – remained the same. “Neutral,” the benchmark for the interest rate level pursued by the monetary authority, has lost relevance. “Inflation,” the reason for all of the committee’s efforts, was mentioned 20 times, as opposed to 31 in the August minutes. And “expectations” decreased, from 8 mentions in August to 3 in September.

A sign that “real time” speaks louder. And it will continue to do so, as long as inflation continues to reach double digits. The IPCA-15 – the official inflation forecast – reached 10.05% in the 12 months through August, the Brazilian Institute of Geography and Statistics (IBGE) reported last Friday.

FOCUS ON SMALL AND MEDIUM-SIZED COMPANIES

COPOM’s practice and discourse, of unprecedented transparency, not only affect investments prospects, strengthening fixed income, but also the real economy through the credit channel. The signals – viewed more as COPOM’s confirmation that the basic interest rate will only drop in 2023 – are evidence of an increase in the cost of credit.

The banking system’s stock of operations grew 7.8% in the year through August, and 15.9% in the last 12 months, boosted by credit granted to families. In the corporate sector, the high interest rate will fully impact micro, small and medium-sized companies – with annual gross revenue of up to R$300 (US$55.3) million or total assets of up to R$240 million.

The increase in loans for this niche reached 12.6% in the year through August and almost 27% in 12 months, while contracts with large companies – with gross revenue exceeding R$300 million or total assets exceeding R$240 million – fell 1.8% in the year and 3% in 12 months through August, Central Bank statistics show.

The highly leveraged increase in basic interest rates – which reinforces the correction of longer rates in a scenario of persistent inflation – tends to particularly punish micro, small and medium-sized companies, which have been increasing their share in the credit stock destined to legal entities.

In August, the share of micro, small and medium-sized companies in the balance of operations for this group reached R$812 billion (43.9% of the total); in August 2020, the balance stood at R$641 billion (39% of the total).

Although with much lower balances, two types of operations attracting growing interest from financial institutions and receivables registrars – newer players introduced into the Brazilian market after the adoption of new rules for receivables on June 7 – are the discounting of trade bills and the anticipation of credit card invoices. Trade bills reached R$142.59 billion in August, up 13.1% year-on-year and 60.3% in 12 months, while advances on card receivables totaled R$53 billion, up 17.1% year-on-year and 42.3% in 12 months.