Creator of the Real Plan proposes Selic at 7.5% in 12 months and shakes up the market

One of the creators of the Real Plan returned to the center of the interest debate with a proposal that envisages taking the Selic rate from the current 13.75% to 7.5% in 12 months. According to Gazeta do Povo, André Lara Resende's idea, published in an article in September, had repercussions to the point where the news outlet's headline spoke of a market on fire. The economist, born in 1951 in Rio, suggests that the drop will be accompanied by an initial additional 2 percentage points, gradually withdrawn.

The core of the argument is a different fiscal diagnosis than usual. For Lara Resende, according to Gazeta do Povo, the country's main fiscal problem is the cost of debt interest, and not primary spending. The debt grows even with the primary result close to balance, because the interest cost exceeds the nominal growth of the economy. He attended PUC-Rio (1973), did postgraduate work at FGV (1975) and a doctorate at MIT (1979). Son of Otto Lara Resende, he created in 1984, with Pérsio Arida, the Larida Plan against inertial inflation.

From what Gazeta do Povo reports, to break out of this cycle the text proposes a National Fiscal and Monetary Council, with fiscal and monetary targets coordinated over a period of 4 to 5 years. In this design, the Central Bank would operate in a range between the inflation target, of 3%, and the economy's potential nominal growth, of around 5.5% per year. International reserves, around US$360 billion, would serve to cushion the exchange rate in a possible capital outflow.

The text received public support from names linked to the government. Gleisi Hoffmann (PT-PR) and José Sérgio Gabrielli, coordinator of Lula's government program, defended the idea. According to Lauro Jardim's column in O Globo, published on Sunday (1st), Lara Resende would have a meeting with Lula in Brasília later that week. The Minister of Finance, Dario Durigan, removed the interest rate adjustment and denied that there was a meeting scheduled. On Tuesday (3), he classified the proposal as an “incipient idea” with “several deficiencies”, according to Times Brasil, and stated that there is still nothing to evaluate.

In practice, the proposal has no formal processing. According to Times Brasil, Durigan said that there is “nothing on the table” and that the team can discuss the topic with Lara Resende and other economists. The question that remains for the government and the market is how to reduce the burden of interest on the debt without losing sight of inflation and exchange rates.

What changes for the investor

For those who invest and operate the stock market, interest rates and the dollar, the moment calls for caution when reading. For now, there is no concrete measure regarding Selic, and the idea still depends on a discussion that the minister himself called incipient. If progress were made, in theory, a drop in interest rates of the proposed magnitude would reduce the return on investments linked to the basic rate and could shift resources to higher risk assets. In terms of exchange rate, the effect would depend on the flow of capital, precisely the scenario in which the aforementioned reserves would act as a buffer. These are possible effects, not a price forecast, and the economic team's next statements should indicate whether the proposal gets off the ground.

Automatically translated from Portuguese.