A proposal by economist André Lara Resende to lower Brazil’s benchmark Selic rate through a new framework linking fiscal and monetary policy could be discussed with President Luiz Inácio Lula da Silva, according to a report. The idea has already raised concern among financial-market participants as pressure grows for Lula’s incoming government to present a credible fiscal plan.
Lara Resende, one of the architects of Brazil’s Real Plan, argued in an article published in late September that high interest rates—not primary government spending—are the main driver of the country’s fiscal strain. He says the cost of servicing public debt is growing faster than the economy’s capacity to generate wealth.
Brazil’s gross debt stands at 82.5% of GDP, or 10.9 trillion reais, the highest level since 2021. Lara Resende calculates that, with the average debt cost at 12.68% a year, interest charges add about 1.4 trillion reais annually, equivalent to 10.5% of GDP. He contrasts that with an estimated primary balance of minus 0.4% of GDP, based on an International Monetary Fund projection.
His proposal would create a National Fiscal and Monetary Council to set joint targets over a four- to five-year period. The Central Bank would commit to keeping the Selic between the 3% inflation target and potential nominal GDP growth, estimated at about 5.5%. As an initial step, the rate would be reduced gradually over 12 months to 7.5%, with a two-percentage-point safety margin relative to potential GDP growth.
Lara Resende acknowledges that an initial rate cut could prompt a rise in inflation, particularly if capital outflows weaken the currency. He proposes using the Central Bank’s foreign-exchange reserves, estimated at US$350 billion, to offset that pressure.
A meeting between Lula and Lara Resende could take place next week, according to columnist Lauro Jardim of O Globo. However, two members of the economic team told Folha there is no formal plan for such a meeting. They said Lula intends to hear from a range of people with differing views on fiscal and monetary policy, and that Lara Resende is one of several economists who have offered to contribute.
The possibility of the proposal reaching Lula has unsettled investors. Two executives at major banks, speaking anonymously, said a cap on the Selic and a joint council for fiscal and monetary policy could worsen market conditions. They argue that Brazil’s high interest rates stem from a lack of fiscal credibility, rather than causing it, and that cutting rates by political decision without a credible anchor could lead to fiscal dominance, volatile expectations and greater uncertainty for investment.
The bank executives also warned that a new council could undermine the Central Bank’s autonomy by making interest rates serve debt costs rather than the inflation target. They said using reserves to counter currency depreciation in such a scenario could prove ineffective.
Economist Sérgio Vale said that forcing rates down by decree had been attempted in 2012 and worsened expectations, with inflation reaching the 6.5% ceiling at the time. He argued that lower rates in the coming years would require fiscal effort, pointing to elevated US interest rates, a deteriorating fiscal balance and significant fiscal stimulus as obstacles.
Marcos Mendes, an associate researcher at Insper, also questioned whether the proposal could work without a structural fiscal adjustment. He argued that the difficulty of achieving such an adjustment is central to the problem and that, if it were accomplished, there would be no monetary or interest-rate issue to solve.
Sources: Folha Mercado.