Economist André Lara Resende has put forward a proposal to lower Brazilian interest rates. As the idea spread across social media and parts of the press, it attracted labels such as rate caps, freezes and “interest rates by decree”—expressions that prematurely dismiss the proposal before its mechanisms have been examined in detail. Public interest is clear: Brazil Stock Guide’s coverage of the proposal generated nearly 1 million social media impressions in 24 hours. That reach brings a greater responsibility to discuss what has actually been proposed.
The proposal carries significant risks, and its viability remains to be demonstrated. But labeling it is no substitute for analyzing it. Between advocating its implementation and dismissing it as a reckless experiment lies an essential task: reading what the economist wrote and examining his assumptions. As I argued recently in this column, Brazil needs to identify the conditions for a lasting reduction in borrowing costs. Lara Resende’s proposal would bring the Selic benchmark rate down to around 7.5% within roughly 12 months and redesign coordination between fiscal and monetary policy.
That provides a concrete framework for questions, calculations and stress tests. Calling the proposal “interest rates by decree” explains little: Brazil’s central bank already sets the benchmark rate. What would change is the rule governing that decision, the monetary authority’s freedom to respond to economic developments, and how investors, businesses and consumers would react. Those are the issues critics should examine.
Brazil knows the cost of a debate that fails to inform policy decisions in time. In the years following the Real Plan—the stabilization program that ended runaway inflation in 1994—and before the sharp currency devaluation of January 1999, criticism of the overvalued exchange rate met resistance to changing one of the pillars of stabilization. A strong currency helped contain prices but put pressure on Brazil’s external accounts, while high interest rates sought to sustain capital inflows. Change was ultimately forced by a traumatic currency crisis that dealt a severe blow to Fernando Henrique Cardoso’s second presidential term just as it began. Preserving stability required acknowledging the limits of that policy framework.
Another legacy of that period deserves attention in assessing Lara Resende’s diagnosis: the public debt structure that survived stabilization. The Real Plan brought inflation down but left indexation mechanisms in place. A substantial share of government securities still pays interest linked to the Selic rate, allowing monetary policy decisions to feed quickly into the Treasury’s interest bill. This does not establish indexation as the sole cause of high rates, but it does require examining how debt composition affects the effectiveness and cost of monetary policy. Lara Resende sees an opportunity here: the same structure that raises debt-servicing costs when rates rise could reduce part of those costs when rates fall. The question is how much of that benefit would survive the response of the exchange rate, inflation and investors.
The central bank controls the Selic rate, but it does not single-handedly determine the returns investors demand to finance the Treasury. Even LFTs—floating-rate government securities linked to the benchmark rate—can trade at a discount, increasing the effective yield buyers receive. That challenges the assumption that the large share of these securities would ensure a smooth transition to lower rates. How much would the Treasury save on outstanding debt? How much would it pay on new issuance? And how would those outcomes change under different levels of investor confidence? The calculations must incorporate these responses without assuming either investor acceptance or a wholesale rejection of government debt.
The exchange-rate argument also requires precision. Lara Resende acknowledges the risk and argues that international reserves could cushion pressure on the real; his critics fear those reserves could be depleted rapidly. Smoothing market turbulence and defending an exchange rate inconsistent with economic conditions are different undertakings. A funding crisis must also be distinguished from an inevitable slide into hyperinflation. The mechanisms behind the risks need to be explained, rather than treating the worst-case scenario as an automatic outcome.
The debate is now open. It requires adverse scenarios, criteria for revising the proposed course and clear rules for implementation. What would happen if inflation proved persistent, the currency continued to depreciate and long-term yields rose? Defenders of the current policy framework must offer an equally testable path under a newly reelected government committed to preserving social programs: what changes would allow rates to fall, through which channels and over what period? A review of tax breaks, the quality of public spending and fiscal predictability all belong in that assessment, alongside the effects of directed lending and debt indexation on monetary policy transmission.
The value of Lara Resende’s challenge lies in demanding an answer to a persistent problem. Every year of high interest rates has consequences for public debt, investment and the economy’s capacity to grow. Those costs must be weighed against the risks of alternative policies with equal rigor. His proposal may ultimately be rejected after that examination. But Brazil cannot turn the difficulty of lowering interest rates into a justification for living with high rates indefinitely.
Leave a Reply