March 29, 2023

Interest rate at six-year high already affecting economic activity in Brazil – News

steady on highest level in the past six yearsThe base interest rate begins to have the first negative effects on the national economy, while curbing the activity of the three main sectors responsible for growth Gross Domestic Product (GDP) – the sum of all final goods and services produced in a country.

Between March 2021 and August last year, Cilic rate It jumped 11.25 percentage points, from 2% to 13.75% annually. The increase was motivated by an attempt to contain the advance of inflation, which had begun to take off from the government’s previously set target cap.

This Wednesday (1), in the first decision of the Lula government, the kuboum maintained the rate at 13.75%, for the fifth time in a row, since August 2022, at the highest level since 2017. The system will remain in effect until the end of March.

In justifying this, the ITC stated that the decision “reflects the uncertainty surrounding its scenarios and a balance of risks with greater than usual variability of potential inflation, and is consistent with the strategy of inflation convergence towards the target over the relevant horizon, which includes 2023 and, to a greater extent, 2024.” .

BC also assessed that “without prejudice to its primary objective of ensuring price stability, this decision also means easing fluctuations in the level of economic activity and promoting full employment.”

Provisions to raise interest rates to contain inflation are already reflected in the latest data from the IBGE (Brazilian Institute of Geography and Statistics). While the service branch, the great economic engine of Brazil, November closed with no growth for the second month in a rowthe Trade (-0.6%) and the Industry (-0.1%) Bitter negative results in the same period.

The CNI (Confederation of National Industry) estimates that selic is at a high enough level to dampen economic activity and contribute to slowing inflation for more than a year.

“The base interest rate at the current level was one of the determinants of the slowdown in economic activity in the second half of 2022 and will remain a significant constraint on activity growth in 2023, when GDP projections point to a 0.8% increase,” according to the Focus Bulletin from The central bank, explains CNI’s director of economic policy, Fabio Guerra.

For Rachel De Saa, chief economics officer at Ricoh, the suppression of economic activity reflects delayed interest rate decision-making for large economic sectors. “When a central bank raises or lowers interest rates, it takes time to affect the economy,” she explains.

Today, we’re already seeing the retail and family services segment, which has been very strong over the past year, slowing down. Within retail, some categories are up, but they’re less credit-related and less important, like autos and home appliances, which are obviously losing ground. […] All this weakness also affects the industry,” Rachel analyzes.

According to Andre Macedo, IBGE director in charge of PIM (Monthly Industrial Survey)The shy performance of the sector responsible for about 20% of the national GDP, which is operating at a level of 2.2% below the pre-pandemic level, is a reflection of the Loss of intensity of the Brazilian economy.

“It cannot be overlooked that the economy is showing signs of losing strength, with rates of default at high levels, and interest rates on the rise, particularly consumer durables, which, although also related to income, also have a direct relationship with the development of credit.” says Macedo.

Perceptions take into account potential The base interest rate as the main monetary policy tool to contain the progress of inflation. This happens because the file Higher interest rates make credit more expensiveReducing the desire to consume and stimulating new investment options by families.

Reflections on the stock market

The jump in the basic interest rate to the highest level since the beginning of 2017 was also negatively reflected on the Stock Exchange last year, with In excess of 50% of all retail stocks.

Among the losses, the American giants (AMER3), Magazine Luiza (MGLU3) and Via Varejo (VIIA3) are among the most prominent, which collapsed, respectively, 68.7%, 62% and 54.3% between January and December 2022.

Idean Alves, Partner and Head of Operations Office in Ação Brasil, says that trade depends a lot on local economic growth and on generating jobs and income so that people can consume more.

“If a consumer has ‘collapsed’ purchasing power, with no confidence regarding the future, and employment, he tends to be more careful, avoiding unnecessary expenses, even basic expenses, such as spending on preventive health care,” he highlights.

Alves adds: “The deterioration of the economic scenario in recent months due to continued high inflation and high interest rates, which should rise again, made investors avoid retail stocks.”