Reasons for the high interest rates of Brazil

The Treasury issues bonds under base rate Selic (11%) and the BNDES lends to companies based on the Long Term Interest Rate (TJLP) of 5%. The spread represents the Treasury subsidies, estimated at R$30 billion a year. Most of them are not included in the Budget of the Union, run outside of primary spending and cannot be influenced by Congress, which holds the task of discussing and approving the budget.

Half of credit operations in Brazil don't obey the base rate (Selic) and therefore are not subject to the Central Bank's monetary policy. These rates only affect free credit.

This means that an important share of portfolios at state-run banks is out of reach for the decisions of the Monetary Policy Committee (Copom). They are guided by fixed rates set by the Monetary Policy Council (CMN).

The result of this model is that to fight inflation with the interest rate, according to the inflation targeting regime, the Central Bank has to double its efforts. And who pays the bill for the high rates are those without access to the BNDES, farm credit from Banco do Brasil or housing loans from Caixa Econômica Federal.

Without understanding this anomaly and its effect on demand, there is no way to seriously discuss the reasons why interest rates in Brazil are much higher than in the rest of the world. Since the Selic affects only half of credit, its level has to be much higher than reasonable to contain inflationary pressures. One of the main channels through which the interest-rate lowers demand and fights inflation is credit.