Eduardo Crespo *
At the end of Lula's first term, with the entry of Guido Mantega the Ministry of Finance who replaced Antonio Palocci, a man linked to economic power, the Brazilian government's economic policy began to shift toward a more heterodox and friendly to growth. But the regime inflation targeting Orthodox stamp that implements the Central Bank remained unchanged. This regime is the core of Brazilian monetary policy is one of the central pillars for any policy change that points to growth.
With the advent of Dilma Rousseff to power, Palocci returned to the government but now as chief minister of the Casa Civil, Dilma position he held since 2005 - and the first steps do not seem very encouraging for the growth. The central bank raised the Selic rate from 10.75 to 11.25 basis points in response to a rise of 5.9 percent in 2010 the index recorded inflation, which exceeded the target of 4.5 percent , time seemed to accelerate in recent months driven by commodity prices. This regulates the trend rate of long-term rates and is not a minor detail that today Brazil is paying the highest base rate in the world. This has driven the real's appreciation against the dollar because capital entering Brazil arbitrating between charges. When Lula came to power in January 2003, changed 3.5 reais per dollar. Today the dollar real 1.7 round.
The high base rate of Brazil has an impact on two fronts. On the one hand, the real appreciation reduces the competitiveness of production, especially manufacturing and services added value, affecting the external accounts, which have a current account deficit even though Brazil was favored by extraordinarily favorable terms of trade and has grown at modest rates compared to other countries in the region. For another, as the majority of Brazilian public debt is linked to base rate, its rise leads to an increase in government spending multiplier effects close to zero over the rest of the economy. Thus, the required rate hikes to curb social spending and infrastructure to maintain the primary surplus used to pay interest. In this context, the President announced a sizable fiscal adjustment. It is evaluating the possibility of promoting a reduction in public spending between 30 and 40 billion reais. It was announced that the minimum wage, an enormous impact on the overall Brazilian economy in 2011 should not go above the 540 reais. Mantega
reached to consider the possibility of excluding the Central Bank rate as the base for setting inflation targets food, whose prices depend on the price of international commodities. The reason, he argues, is that local demand, and consequently interest rates charged in Brazil, have no direct influence on those prices. Thus, the increase rate interest has negative effects on domestic demand, public expenditure and the exchange rate even if the price hike is not a result of internal conditions.
However, beyond the real causes of inflation in Brazil, we must recognize that the target regime has been quite successful in controlling inflation. What has been your secret? We understand the impact that high rates have on the Brazilian exchange rate appreciation has been the main factor that kept inflation in check. The cheap dollar has a favorable effect on rates and prices of tradable indexed while having a beneficial effect on wages cushioning distributional conflicts. There is the "paradox" that increase the profitability of the financial sector and wages at the same time. The cheap dollar is not an unwanted side effect of a policy to control demand. By contrast, in Brazil is much more clear correlation between the exchange rate and inflation between the latter and aggregate demand.
Today the region seems to face a dilemma. Some countries, like Argentina, have low base rates, high exchange rates but tended to the assessment because they experience high levels of inflation. But others, such as Brazil, require high basic interest rates, exchange rates appreciated and lower levels of inflation. Either way, the reputation of the major developmental cabinet members Dilma augurs not a complete change in direction hinted incipient heterodox Lula's second term. Brazilian reserves are around 300 billion dollars and would allow it to continue to stimulate domestic demand without any serious risk of devaluation and runaway inflation.
* Professor at the Federal University of Rio de Janeiro, Brazil.
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