By Brazil Stock Guide — André Lara Resende, one of the architects of Brazil’s Cruzado and Real stabilization plans, has unveiled a proposal to cut the country’s benchmark interest rate to approximately 7.5% within 12 months and eventually establish a permanent range of 3% to 5.5%.
The ambitious plan calls for a fundamental overhaul of monetary policy, the creation of a new body to coordinate fiscal and monetary decisions, and a strategy to bring down the cost of Brazil’s public debt. The proposal is gaining political relevance ahead of Lara Resende’s scheduled meeting with President Luiz Inácio Lula da Silva in Brasília next week, as reported by O Globo on Sunday (November 1).
Lara Resende’s central argument turns the conventional explanation for Brazil’s fiscal problems on its head. Rather than accepting that interest rates must remain elevated because the government spends too much, he argues that high interest rates themselves are the main driver of rising public debt and fiscal imbalances. He laid out the case in a September 25 Substack essay titled Eu Acuso: Uma Proposta para Eliminar os Juros Absurdos (I Accuse: A Proposal to Eliminate Absurdly High Interest Rates) and subsequently discussed it at an event hosted by the Brazilian Center for International Relations (CEBRI).
Understanding his argument requires distinguishing between two measures of Brazil’s fiscal accounts. The primary balance measures the difference between government revenue and spending, excluding interest payments on public debt. The nominal balance includes those financing costs. Lara Resende points out that while Brazil runs relatively modest primary deficits by international standards, its overall fiscal deficit remains substantial because interest payments absorb an exceptionally large share of public resources.
The figures cited by the economist illustrate the scale of the problem. In June 2026, the average cost of Brazil’s public debt had reached 12.68% annually. Applied to gross public debt of R$10.9 trillion, equivalent to 82.5% of gross domestic product (GDP), that rate would translate, by his calculations, into an annualized financing cost approaching R$1.4 trillion, or 10.5% of GDP. Lara Resende argues that conventional fiscal tightening could not offset such a burden without imposing considerable economic and social costs.
The underlying arithmetic is straightforward. If the cost of debt is running at nearly 13% annually while nominal GDP grows by approximately 7%, the debt burden tends to increase relative to the size of the economy, other things being equal. Lara Resende estimates that this gap creates an upward pressure on the debt-to-GDP ratio of roughly 5.7% a year. In his view, Brazil’s Central Bank is effectively aggravating the very fiscal problem it claims to be fighting by keeping interest rates excessively high.
Lara Resende does not dismiss the importance of fiscal discipline or controlling public expenditure. He acknowledges that Brazil’s government often spends inefficiently, operates an excessively complex tax system, and maintains subsidies and tax benefits of questionable economic value. His disagreement concerns the relative importance of these problems. Even aggressive restraint of primary spending, he argues, would be insufficient to stabilize public debt as long as financing costs remain far above the economy’s growth rate.
The consequences of high interest rates, he argues, extend well beyond the Treasury’s accounts. Attractive returns on government bonds discourage investors from financing new businesses, expanding factories, or investing in companies. Meanwhile, bank credit remains expensive for households and corporations, adding pressure to family indebtedness, working capital, and private-sector investment. The result, in his assessment, is an economy that generously rewards financial investment while placing substantial obstacles in the way of productive enterprise.
A New National Fiscal and Monetary Council
Lara Resende’s proposed solution begins with the creation of a National Fiscal and Monetary Council (CFMN), tasked with establishing coordinated fiscal and monetary policy targets over a four- to five-year horizon. The idea is to move away from the rigid separation of two policies that, he argues, directly influence one another. The Central Bank would remain responsible for implementing monetary policy but would operate within jointly established guidelines for interest rates, inflation, and fiscal sustainability.
The new council would also help guide a broader restructuring of public finances, including tax simplification, improvements in spending efficiency, and long-term investment planning. Lara Resende advocates treating government operating expenditures and transfers separately from public investment, which requires multiyear planning and an assessment of expected returns. Economic policy would therefore become less dependent on annual fiscal targets and interest-rate decisions made in isolation.
The most radical element of the proposal is the introduction of explicit limits on the Selic rate — an idea likely to make bankers and asset managers along São Paulo’s Faria Lima financial corridor, as well as foreign investors, deeply uneasy. The floor would correspond to Brazil’s inflation target, currently 3% annually. The ceiling would be determined by the economy’s potential nominal growth rate, calculated as the sum of the inflation target and potential real GDP growth. Assuming potential growth of 2.5%, the ceiling would be 5.5%, leaving the benchmark interest rate normally confined to a range of 3% to 5.5%.
The economic rationale is to prevent the government’s basic financing cost from remaining systematically above the nominal growth rate of national income. If the economy expands by 5.5% in nominal terms and the cost of public debt moves closer to that level, interest payments would exert less upward pressure on the debt burden. The actual debt trajectory would still depend on primary fiscal balances, the composition of government securities, and other factors, but Lara Resende contends that the new framework would remove the main force behind rising indebtedness.
The transition would not happen overnight. To avoid shocking financial markets, the Central Bank would announce in advance a gradual reduction in the Selic over approximately 12 months, bringing the rate down to 7.5%. That level would represent the structural ceiling of 5.5%, plus a temporary safety margin of two percentage points. The buffer would be reviewed periodically and gradually phased out, allowing rates eventually to converge toward the permanent target range.
The potential fiscal savings would be substantial. According to Lara Resende, reducing the average cost of public debt from approximately 13% to 7.5% could generate annual savings equivalent to nearly four percentage points of GDP once the lower rates work their way through the debt stock. Brazil’s nominal fiscal deficit, currently heavily influenced by interest payments, could fall significantly. This is a projection contingent on an actual decline in government borrowing costs, however, rather than an immediate or guaranteed saving.
An important element of that calculation is the composition of Brazil’s public debt. Lara Resende highlights the significant share of Letras Financeiras do Tesouro (LFTs), floating-rate government securities whose returns are linked to the Selic. Unlike fixed-rate bonds, which continue paying their contracted yields until maturity, these securities adjust rapidly when the benchmark rate changes. Their substantial presence in Brazil’s debt structure, he argues, would allow lower interest rates to translate relatively quickly into reduced government financing costs.
The greatest risk acknowledged by Lara Resende himself lies in the foreign-exchange market. A sharp reduction in interest rates would diminish the appeal of holding Brazilian real-denominated assets, potentially encouraging investors to buy dollars and move capital abroad. A weaker real, in turn, could push up the prices of fuel, imported goods, and other products, undermining inflation control. To address that risk, the proposal envisages the Central Bank using Brazil’s international reserves, exceeding $350 billion, when necessary to smooth excessive exchange-rate movements.
During the CEBRI debate last month, participants questioned whether those reserves would be sufficient to contain a broad rush into dollars, and whether simply announcing a path toward dramatically lower interest rates might prompt investors to react immediately. Questions were also raised about how the proposed interest-rate range would compare with borrowing costs abroad and whether financial markets would trust the government to maintain its commitments over time.
Lara Resende rejects the notion that financial-market behavior makes such a shift impossible. Investor reactions, he argues, depend fundamentally on expectations and the credibility of the announced strategy. His proposal is designed precisely to coordinate those expectations, presenting lower interest rates as part of a long-term solution to Brazil’s debt problem rather than an isolated effort to stimulate economic activity. He nevertheless acknowledges that the precise parameters would require negotiation and that Brazil’s current institutional environment may not be conducive to immediate implementation.
The proposal outlined in September has important precedents. In 2022, a group of economists coordinated by Lara Resende at CEBRI published Diretrizes de Políticas Públicas para 2023 (Public Policy Guidelines for 2023), a document that already advocated coordinating fiscal and monetary policy through a joint committee. Gabriel Galípolo, now governor of Brazil’s Central Bank, was among the participating specialists.
In the recent discussion, Lara Resende said the ideas had previously been presented to Lula and members of his economic team but had failed to gain traction. The 2022 document, however, did not include the same quantitative timetable for cutting the Selic that Lara Resende is now proposing.
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