The Decline of the Long-Term Real Interest Rate
In this report, we examine the effects of the decline of the long-term real interest rate, which besides a transitory component caused by the decrease of the SELIC rate, has a highly persistent component, the decline of the neutral real interest rate. The consequences of the falling long-term real interest rate are varied. The foremost is a shift in the composition of asset portfolios, of which the rise of the IBOVESPA is an example. Another, equally or even more important consequence, is its effects on the real side of the economy, helping the recovery, as is the case of civil construction. The combination of this persistent decline of the interest rate and the microeconomic reforms that have contained lending by the BNDES and led to the vigorous emergence of long-term credit through the capital market have opened a new transmission channel of monetary policy, increasing its power. Hence, the proportion of long-term loans at low real interest rates (and sensitive to the SELIC rate) has been growing. In the current situation of the Brazilian economy, a need still exists for monetary stimuli, one of which is further widening of this credit channel.
The recovery, although still slow, of the Brazilian economy is due only to monetary policy. Not only has the Central Bank put the basic interest rate below the neutral level, which is necessary to bring inflation to the target, it has been harvesting the benefit of the widening of this effective new transmission channel. For this channel to continue delivering the positive results achieved so far, it is necessary for the long-term interest rates to remain low. The Central Bank’s caution in establishing the basic interest rate, whose easing cycle has now ended with the SELIC rate at 4.25%, has reduced or even eliminated the possibility of the emergence of an “inflation premium” in the yield curve. Nevertheless, fiscal policy reforms still need to be instituted to guarantee compliance with the spending cap, to avoid the appearance of a “risk premium”. Should such a risk occur, monetary policy will lose efficacy, at the cost of impairing the recovery. It is thus important for monetary policy to continue benefiting the anchor provided by the good execution of fiscal policy.
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