Country leader in usury and inequality

Since last year, under the Roberto Campos Neto administration, and in 2025, under the Gabriel Galípolo administration, the Central Bank has significantly increased the basic interest rate , the Selic. The ex ante real rate, the nominal interest discounted from expected inflation, has risen to record levels, placing Brazil, once again, as the world champion or runner-up in usury. At the last meeting of the Monetary Policy Committee (Copom), the Central Bank leadership indicated that interest rates will remain high for a long time.

Some basic questions. Can high interest rates really control and reduce inflation, as their advocates often claim? And if so, at what cost in terms of adverse effects on GDP, employment, public finances and distribution of national income? Is this an effective policy? And even if it is effective, is it also an efficient policy?

There is little doubt that high interest rates generally contribute significantly to reducing inflation. Through at least three channels. First, because they compress aggregate demand for consumption and investment in the economy, which exerts downward pressure on the prices of non-tradeable goods and services, including labor remuneration. Second, because they tend to cause exchange rate appreciation, which depresses the prices in reais of internationally tradable products (both exportable and importable). Third, because the rise in basic interest rates, if seen as sustainable, usually reduces inflation expectations and, in this way, tends to reduce current inflation and long-term interest rates.

Therefore, high interest rate policies are usually effective in reducing inflation. However, they are not efficient because several factors limit their anti-inflationary effects. In other words, they are effective because they reduce inflation, but they are not efficient because they achieve this result by causing great damage and side effects.

Those who receive the scorching interest are the government's creditors, mainly the super-rich.

I will try to address some aspects of this complex issue. First, in a continental economy like Brazil, the degree of external trade openness, measured by the ratio of foreign trade flows to GDP, is lower than that observed in small, open countries. In small countries, such as Switzerland, Belgium, and the Netherlands, among many others, the degree of openness is very high and almost always well above 100%. In these cases, the external appreciation of the national currency induced by high interest rates or other factors has a decisive impact on inflation. In the case of Brazil, which has a degree of openness of around 40%, the anti-inflationary impact of an external appreciation of the real, although not negligible, is rarely decisive. Incidentally, in the United States, another continental economy, the degree of openness is even lower, less than 20%. In other words, the exchange rate appreciation required to achieve a certain reduction in inflation is greater in countries like Brazil, which tends to undermine the international competitiveness of the economy.

A second aspect of the issue: there is always some rigidity in prices and wages when falling. In economies like Brazil, which have a long tradition of indexation, there is also some inflation inertia, that is, the tendency to bring past inflation into the present. Thus, the anti-inflationary effect of a given contraction in aggregate demand is smaller than it would be if prices and wages were more flexible and the inertial component of inflation were smaller.

In short, for these and other reasons, a significant contraction in demand and a significant appreciation are needed to reduce inflation and bring it within the target, especially when this target is set in an excessively ambitious manner, a legacy of the incompetent economic management in the Temer government.

Worse still, high interest rates produce other destructive side effects. In addition to slowing down the economy, they destabilize public finances in two ways: directly, by increasing the cost of the tax, and indirectly, through the effects of the decline in the level of activity on revenue and cyclical expenses such as unemployment insurance. The public sector as a whole currently bears net interest expenses of around 8% of GDP! This component, and not the much-vaunted primary fiscal result, is what explains the public deficit and the growth of government debt. The primary deficit is around 0.6% of GDP.

But the problem doesn’t stop there. When the government pays scorching interest rates, who receives it? Who are the government’s creditors? Basically, the super-rich, the wealthy and, to a lesser extent, the upper middle class, in addition to foreign creditors. High interest rates are, in fact, a powerful instrument for concentrating income in a country that has long been one of the world’s champions in terms of social inequality. It is also worth noting that this monetary policy places reais precisely in the hands of those who are highly prone to capital flight in times of uncertainty, such as at the end of 2024 – facilitated, remember, by the premature liberalization of the capital account, a regrettable legacy of the Fernando Henrique Cardoso administration. Thus, the monster of destabilizing currency speculation is fed with generous interest rates. The country suffers and the rich crowd celebrates.

No one is asking the new leadership of the Central Bank to change monetary policy. But, frankly, status quo? Keep everything as it was in the previous administrations of the institution? •

Published in issue no. 1369 of CartaCapital , on July 9, 2025.

This text appears in the printed edition of CartaCapital under the title 'Leading country in usury and inequality'