Why isn't Brazil's 15% Selic rate working? Carlos Santos analyzes the paradox: strong job market, high fiscal risk, and global instability delaying the rate's expected effect.
The Paradox of High Rates: Why Brazil's 15% Selic Rate Isn't Delivering the Expected Economic Results
Por: Carlos Santos
It’s the question haunting Brazilian markets and dinner table conversations: why is the Selic rate, the country's benchmark interest rate, sitting at a towering 15% a year, yet the intended effect of fully curbing inflation and normalizing the economy remains elusive? As a longtime observer of Brazil’s complex financial landscape, I, Carlos Santos, find myself increasingly frustrated by this economic conundrum. The standard monetary textbook says high rates should dramatically slow credit, cool demand, and, eventually, anchor inflation expectations. But in Brazil, a cocktail of persistent fiscal concerns, global instability, and a uniquely resilient job market seems to be creating a disconnect, forcing the Central Bank to maintain an aggressively contractionary policy for longer than anyone anticipated, thus stifling growth potential.
The Tug-of-War: Fiscal Policy vs. Monetary Policy
The conventional understanding of monetary policy, which relies on the Central Bank's control over the Selic rate, is that it directly influences the cost of credit, investment, and consumption. When the rate is high, as it has been, the economy is supposed to decelerate sharply. However, a significant part of the problem, as highlighted by expert analysis, including coverage from InfoMoney, is the ongoing and often conflicting role of fiscal policy.
The Brazilian economy is currently experiencing a profound tug-of-war. On one side, the Central Bank is using the Selic—the highest real interest rate globally—to pull the economy back and control prices. On the other side, government spending and fiscal expansion act as a powerful counter-force, fueling demand and injecting liquidity back into the system. This expansionary fiscal impulse is a critical reason why the monetary policy's full, expected cooling effect has been delayed. When the government spends more, it increases the overall aggregate demand, making the Central Bank's job of slowing the economy through higher interest rates significantly harder and longer. Economists refer to this as a lack of coordination between fiscal and monetary authorities, a key structural weakness that keeps the country's risk premium elevated and its growth path uncertain.
🔍 Zoom na realidade
The reality on the ground in Brazil is a study in contradictions, which helps explain the sluggish transmission of the 15% Selic rate. While some sectors show signs of moderation, other key areas remain stubbornly resilient. Specifically, the labor market has shown remarkable strength.
Despite the highly restrictive monetary conditions, unemployment has fallen to historically low levels (around 5.6% in recent reports), and real income has remained high. This strong labor market resilience is a major factor in maintaining consumer demand. When people are employed and earning, they continue to spend on services and essential goods, which exerts constant inflationary pressure, particularly on sectors like services, which are less sensitive to interest rate hikes and more sensitive to domestic demand.
Furthermore, a significant portion of inflation in Brazil has been driven by non-monetary factors, such as volatile commodity prices (especially food and energy) and global supply-chain disruptions, which are largely outside the direct control of the Central Bank's Selic rate. The monetary tool is effective at controlling demand-driven inflation, but less so at controlling cost-push or structural inflation. Therefore, a high Selic rate effectively punishes the economy with higher borrowing costs without necessarily solving the core price increases that originate from external or supply-side shocks. This makes the rate feel less effective and more economically damaging than a simple inflation number might suggest.
 |
| Sede do Banco Central em Brasília 22/03/2022. REUTERS/Adriano Machado |
📊 Panorama em números
The numbers paint a clear, albeit complex, picture of the Brazilian economy's response—or lack thereof—to the high Selic rate. The primary goal of the Selic is to bring the official inflation index, the IPCA (Broad National Consumer Price Index), back to the target ceiling.
| Metric | Target/Range (2025) | Recent Data (Approximate) | Impact on Monetary Policy |
| Selic Rate | N/A | 15.00% p.a. | Highest real rate globally, indicating aggressive tightening. |
| IPCA (Inflation) | 3.0% ( | Elevated, with core measures above target. | Shows that current rate is not yet fully anchored expectations. |
| Unemployment Rate | N/A | Historically Low ( | Resilient labor market fuels demand, complicating inflation control. |
| IPCA Expectations | Anchor to Target | Above Target for 2025/2026 (Focus Survey) | Unanchored expectations necessitate keeping the Selic high. |
| Credit Costs for Companies | N/A | Risen from | Signals the severe contractionary effect on investment and production. |
Data compiled from Central Bank of Brazil, IBGE, and financial market reports.
These figures demonstrate a persistent issue: Inflation expectations for the medium and long term are still unanchored, meaning financial markets and economic agents don't fully believe the Central Bank will meet its targets in time. For instance, the Focus survey often shows expectations for the next few years remaining above the 3.0% target set by the National Monetary Council (CMN). This lack of credible expectation convergence is perhaps the most significant numerical factor forcing the Central Bank to maintain its restrictive stance, as it is the very anchor for future price stability. Furthermore, the massive jump in the cost of credit for the productive sector clearly shows that while the rate is crippling investment, it hasn't yet translated into the desired deflationary impact across the board due to the other structural factors.
💬 O que dizem por aí
The high Selic rate has become one of the most polarizing topics in Brazil, dividing economists, politicians, and the public into starkly opposed camps.
The Central Bank (BCB) itself, through its Monetary Policy Committee (Copom), maintains a cautious, hawkish stance. They argue that despite some moderation, core inflation (which strips out volatile items) remains elevated and that long-term inflation expectations are still above the target range. They emphasize that a prolonged period of a significantly contractionary policy is necessary to fully guarantee the convergence of inflation to the target, especially given the global environment and domestic fiscal uncertainty.
On the other side, the productive sector and some political groups—including the current government—are highly critical. Entities like the National Confederation of Industry (CNI) have warned that the excessive rate is causing a sharp increase in operating costs for companies, leading to job cuts, postponed investments, and a deep, unnecessary slowdown in economic activity. They argue the Central Bank is being overly conservative and unduly sacrificing growth.
Finally, prominent economists often point to fiscal fragility and fiscal risk as the "elephant in the room." They contend that as long as there is high uncertainty about the country's future fiscal framework and continuous pressure from public spending, the Central Bank has no choice but to keep interest rates high to compensate for the higher perceived risk and the pro-cyclical fiscal stimulus that feeds demand inflation. In essence, the high Selic is a symptom of fiscal policy weakness, not a failure of monetary policy alone.
🧭 Caminhos possíveis
When faced with a highly restrictive monetary policy that isn't generating the desired effects quickly, the possible paths forward for Brazil’s economic managers can be grouped into three main strategies, each with its own trade-offs.
1. The Fiscal Anchor Path (The Preferred Economic Path):
This involves a firm commitment by the government to a credible and sustainable fiscal framework. If the market were to see clear evidence of reducing public debt and a commitment to fiscal discipline, the need for the Central Bank to maintain such a high risk premium via the Selic rate would diminish. A strong fiscal anchor would immediately help to re-anchor inflation expectations at the target, allowing the Central Bank to accelerate its cycle of interest rate cuts without fearing a rebound in prices or a major exchange rate depreciation. This path promises a more sustainable, long-term growth trajectory.
2. The Prolonged Tightening Path (The Current Path):
This is the path of patient endurance. The Central Bank continues to maintain the Selic at a very high level (15% or even higher, if necessary) for a prolonged period, waiting for the lagging effects of past hikes to fully materialize. While politically unpopular and economically painful in the short term, this path aims to eventually crush demand, slow the resilient labor market, and force inflation back to the target through sheer contractionary force. The main risk is an overkill—pushing the economy into an unnecessary and deep recession.
3. The Unilateral Rate Cut Path (The Political Risk Path):
Under heavy political pressure, the Central Bank could be forced to cut the Selic rate prematurely or too aggressively, even if inflation expectations remain unanchored and fiscal risks are high. This would likely be followed by a sharp depreciation of the Real, a significant increase in inflationary pressure (due to the exchange rate channel), and a major loss of Central Bank credibility. Ultimately, a premature cut would likely lead to a vicious cycle where rates would have to be raised even higher later to compensate, costing the economy far more in the long run.
🧠 Para pensar…
The Brazilian conundrum forces us to reflect deeply on the very nature of economic policy transmission in an emerging market. Why do the same tools that work efficiently in developed economies struggle to achieve their goals here?
One key area for reflection is the monetary policy transmission mechanism itself. In developed markets, interest rate changes quickly impact the economy through a variety of channels: a significant and sensitive credit market, a strong balance sheet channel, and a robust capital markets channel. In Brazil, however, the transmission mechanism is often distorted. A large portion of financial assets are indexed to the Selic rate, making a significant part of the financial economy immune to changes in the policy rate. This dampens the asset value transmission channel. Furthermore, the high degree of financial exclusion and the prevalence of non-bank financing, particularly for essential goods and public spending, means that a rate hike doesn't slow down activity as uniformly or as quickly as expected.
Another crucial point for reflection is the credibility gap. When markets and consumers are uncertain about the government's long-term commitment to fiscal discipline, the Central Bank is forced to overcompensate. The Selic rate, in this context, is not just fighting inflation; it’s fighting fiscal mistrust. It's a high-interest premium being charged for the uncertainty of the sovereign risk. To truly unlock lower rates and unleash growth, Brazil needs a coordinated effort where sound fiscal policy removes the burden of systemic mistrust from the monetary policy. Without that coordination, the Selic will remain a crude, heavy hammer instead of a finely tuned instrument.
📚 Ponto de partida
The question of the high Selic rate and its effectiveness serves as an excellent starting point for understanding the fundamentals of Brazilian macroeconomics. To grasp the current situation, we must first firmly establish the official function and the structural constraints of the Selic.
The Selic Rate (Sistema Especial de Liquidação e de Custódia) is the fundamental benchmark rate for the Brazilian economy, set by the Monetary Policy Committee (Copom) of the Central Bank (BCB). Its sole, legal purpose under the inflation targeting regime is to control inflation (IPCA) and keep it within the target range established by the National Monetary Council (CMN).
The conventional operation is this: an increase in the Selic rate raises the cost of bank funding. This is then passed on to consumers and businesses via higher interest rates for loans, financing, and credit cards. Higher credit costs are intended to discourage consumption and investment—decreasing aggregate demand—which, in turn, reduces the upward pressure on prices. However, the current situation of a high Selic with slow-to-converge inflation suggests that this primary function is being heavily mitigated by other, larger forces. These forces include, as discussed, the stimulus from fiscal policy, the persistence of service-sector inflation driven by the strong job market, and the need to compensate for the high external volatility and a risk premium linked to global financial conditions. The Selic's function is clear, but its effectiveness is being diluted by these countervailing domestic and international pressures.
📦 Box informativo 📚 Você sabia?
Did you know that the Selic rate isn't just about consumer loans? Its impact on the government's finances—and thus, the national debt—is monumental, which further complicates the debate over its high level.
The Cost of the High Selic on Public Debt
The Brazilian government's public debt is one of the largest expenditure items in the national budget. A substantial portion of this debt is either directly indexed or indirectly linked to the Selic rate. This means that every time the Central Bank raises the Selic, or keeps it high, the cost of servicing the national debt immediately increases.
Key Facts on Public Debt and the Selic:
Debt Indexation: A significant percentage of Brazil's domestic federal public debt is composed of securities that pay interest linked to the Selic rate (like LFTs/Treasury Selic).
Fiscal Drag: When the Selic is at 15% p.a., the amount of money the government must pay out in interest dramatically rises, leading to a massive transfer of public resources to financial creditors. This payment reduces the fiscal space available for essential investments in health, education, and infrastructure.
Reinforcing Fiscal Risk: This massive debt servicing cost creates a self-fulfilling negative loop. The high Selic increases the public debt cost, which worsens the fiscal outlook, which in turn reinforces the market’s perception of fiscal risk, and compels the Central Bank to keep the Selic high to compensate. It's a key structural trap that highlights the interconnectedness of monetary and fiscal policy challenges in Brazil.
This fiscal impact is a constant political and economic pressure point, demonstrating that the Selic’s decision is never purely about inflation—it is also a major budgetary constraint. The Central Bank must weigh the need to fight inflation against the huge fiscal burden it places on the government.
🗺️ Daqui pra onde?
Looking ahead, the direction of the Brazilian economy hinges on a handful of interconnected variables that will determine whether the Selic rate can finally begin a meaningful and sustained downward trajectory. The path from here is not linear, but rather dependent on the convergence of three critical factors:
1. Sustained Disinflation: While headline inflation has shown some moderation, the key will be the sustained decline of core inflation (which excludes the most volatile components like food and energy) and, crucially, inflation in the services sector. The Central Bank will not be comfortable with significant cuts until it sees concrete evidence that these underlying pressures are consistently easing, signaling a real slowdown in domestic demand.
2. Fiscal Certainty: The single most important domestic factor is the establishment of a clear, credible, and long-term fiscal framework. If the government can demonstrate a political and technical commitment to controlling its spending and stabilizing the public debt trajectory, it will drastically reduce the country's risk premium. This fiscal clarity acts as a powerful complement to monetary policy, accelerating the drop in inflation expectations and, consequently, the Selic rate.
3. Global Stability: The external environment remains adverse and highly volatile. Continued tightening in advanced economies, particularly the US, or renewed global geopolitical tensions, can lead to capital flight and a significant depreciation of the Brazilian Real. The Central Bank must constantly monitor the global scenario, as any sharp currency depreciation immediately fuels imported inflation, forcing them to maintain a higher Selic rate as a defense mechanism.
The next few quarters will be a balancing act, where the BCB seeks the right moment to pivot from aggressive tightening to cautious easing, a decision that will be dictated more by the anchoring of expectations and the solidity of the fiscal path than by the latest headline inflation print alone.
🌐 Tá na rede, tá oline
"O povo posta, a gente pensa. Tá na rede, tá oline!"
The frustration over the high Selic rate isn't just a point of contention in financial reports; it’s a dominant topic on social media, reflecting the real economic pain felt by citizens and businesses. The online discourse is often a mix of sharp, sometimes polarized, criticism.
One recurring theme across social media platforms is the visceral comparison of the high Selic rate to the low growth rate: "The Selic is 15%, but my job's growth is 0%! Where's the money going?" This sentiment highlights the public's perception that the high cost of money is not leading to a proportional economic benefit—it's only causing stagnation.
Another powerful narrative centers on fiscal responsibility. Many informed users and commentators share graphics illustrating the massive cost of debt servicing (the "Box informativo" is directly related to this), arguing that the Selic is being held hostage by the government’s lack of a firm, credible fiscal anchor. They post critiques suggesting the Central Bank is forced to use the interest rate as a tool to compensate for political and budgetary uncertainties, rather than simply as a tool for demand management.
Conversely, there's also a vocal online presence—often from the financial market side—defending the Central Bank's autonomy and prudence. They argue that the BCB must be resilient against political pressure, pointing to unanchored inflation expectations and the strong labor market as proof that the inflationary risk is still real. The online conversation thus acts as a real-time sounding board, pitting the economic pain of the present against the fear of a return to high inflation in the future.
🔗 Âncora do conhecimento
To truly appreciate the complex interplay between interest rates and government policy in Brazil, it's essential to stay informed about the key statements that drive market perception. Understanding how top officials view the state of the economy—and the fiscal framework—provides indispensable context for the Central Bank’s decisions on the Selic. For a deeper, authoritative look at recent government sentiment and the economic landscape that pressures the Central Bank's decision-making, it’s critical to read primary source material. To gain a comprehensive understanding of how high rates interact with official government commentary and broader economic uncertainty, you should
Reflexão final
The 15% Selic rate is more than just a number; it's the stark reflection of Brazil's enduring structural challenges. It is the Central Bank's necessary defense mechanism against global headwinds, unanchored expectations, and, most powerfully, the continuous stimulus provided by a loose fiscal policy. We cannot, therefore, simply criticize the tool without addressing the root cause. The paradox is that the high rate is a measure of the economic risk perceived by the market, and that risk will only truly fall when the country collectively commits to a credible, long-term framework for its public finances. Until then, we must be patient, critical, and demanding of a policy synergy that prioritizes sustainable growth over short-term political expediency. The path to a lower Selic is not paved with mere rhetoric, but with hard fiscal discipline.
Recursos e fontes em destaque
Banco Central do Brasil (BCB): Copom Statements and Inflation Reports. Essential for official data on the Selic rate, inflation projections, and monetary policy reasoning.
IBGE (Brazilian Institute of Geography and Statistics): Official data on the IPCA (inflation), unemployment rate, and GDP.
Trading Economics/Financial News Services: For up-to-date data on interest rates, currency volatility, and market expectations (e.g., Focus Survey summaries).
Economic Think Tanks and Consultancies: Reports from Austin Rating and others, often cited in news outlets like InfoMoney, provide expert analysis on the disconnect between the Selic and economic performance.
⚖️ Editorial Disclaimer
This article reflects a critical and opinionated analysis produced for Diário do Carlos Santos, based on public information, reports, and data from sources considered reliable. It does not represent official communication, financial or investment advice, or the institutional position of any other companies or entities mentioned herein. The opinions expressed are the sole responsibility of the author, Carlos Santos.
Post a Comment