The Lula government exempted Brazilians earning up to R$ 5,000 per month from income tax, implemented discounts for those earning up to R$ 7,350, and created some breathing room in family budgets with programs like Gás do Povo (People's Gas), Luz do Povo (People's Light), and Reforma Casa Brasil (Brazil Home Renovation). However, it risks shooting itself in the foot and damaging its monetary policy if it revives the expectation that parafiscal measures can be adopted to support the economy.
And the risk is high if the intention to set a ceiling for private payroll-deducted loans goes ahead – a type of loan guaranteed by the payroll of workers under the CLT (Brazilian labor law) and, soon, by the balance of the FGTS (Brazilian employee severance fund).
When so many measures have been implemented without increasing the government's positive approval rating, as recent opinion polls demonstrate, the temptation for the Ministry of Labor and Employment to set this ceiling – information anticipated by the newspaper O Globo – suggests that the Executive branch has exhausted its options for appeasing voters who, in October, will choose the next president of the Republic, as well as a willingness to circumvent the conservative bias of banks in granting credit. And not without reason.
For some time now, banks have been grappling with default rates that erode balance sheets and tend to force them to pull the handbrake. In January, default rates reached 4.25% for general credit, the highest level in the historical series. For households, the rate spiked to 5.24%. Only for companies was the variation more modest, at 2.59%, according to the Central Bank.
Offering zero risk to the banking system, the loan program for retirees and pensioners of the INSS (Brazilian National Social Security Institute) was launched in 2003 – during Lula's first term. In March 2025, Lula's third term revived the program and created "Worker's Credit," dedicated to professionals registered under the CLT (Brazilian labor law) regime. The president expanded the scope of beneficiaries to include drivers and delivery workers for apps.
Keeping a close eye on the market, in December the Treasury also reported that it was studying a formula to curb abuses in interest rates in this operation which, in theory, could extend to 47 million workers with formal employment contracts – a number estimated by the Ministry of Labor and Employment.
The sum of private payroll loans, loans to public servants, and loans to INSS beneficiaries – the latter two already with an interest rate ceiling set at 1.85% per month – corresponds to 10% of the total bank credit balance in the country, a ratio of R$ 742 billion to R$ 7.1 trillion. Therefore, an interest rate ceiling on private payroll loans would have a limited impact on the system, but for now, that's the case. "Worker's Credit" has everything it needs to grow because institutions don't take risks and borrowers pay less.
But the possibility of interfering with "prices" is a bad idea because it renews market concerns about the likelihood that the economic team, to be led by Dario Durigan after Fernando Haddad's departure, will adopt parafiscal measures to boost activity, which is expected to weaken in the second quarter but could be supported by credit growing at over 10% per year.
Oil is the "knife to the throat" of the Copom (Monetary Policy Committee).
The practice by BNDES (Brazilian Development Bank) of operating with below-market interest rates, with the differential financed by the Treasury in the 2010s, has not been forgotten. While no longer used in Lula's third administration, this initiative challenged monetary policy and fueled the expansion of public debt – a terrible memory in the current context of distrust in the government's willingness to contain spending and stabilize its debt.
In mid-January, the Ministry of Labor reported that private payroll loans exceeded R$ 101 billion, benefiting 8.5 million borrowers, and the goal is to reach 25 million private sector workers within four years. The loans already contracted had an average value of R$ 11,895.36, monthly installments of R$ 245.90, and an average interest rate of 3.2% per month.
In January, Minister Luiz Marinho warned that there would be no tolerance for high interest rates, but abuses were identified. And the Central Bank's statistics are revealing. In January, the interest rate for payroll loans for public servants was 23.7% per year; for INSS beneficiaries, 24%; and for private payroll loans, 57.4%. February's data will be released on the 30th.
Abuses must be curbed, but setting a ceiling for operations, if formalized, will affect the Central Bank and could create enough noise to overshadow the possibility of the Selic rate falling more quickly. This is a prospect, moreover, that the conflict in the Middle East is already creating, should the war not be concluded quickly and oil prices remain under pressure . The commodity hit US$120 per barrel of Brent crude at the very beginning of the fighting, retreated to US$90-US$92 with the release of strategic reserves, but on Thursday, March 12th, it regained momentum towards US$100.
A threat to global and local inflation – this one in the hands of Petrobras. A fuel price adjustment would work against the Central Bank's effort to pursue the inflation target. An effort that will be tested on Wednesday, the 18th, when the Copom (Monetary Policy Committee) sets the next Selic (benchmark interest rate) in a meeting held concurrently with the Federal Reserve's (Fed) monetary policy meeting. On Thursday, the 19th, the European Central Bank, the Bank of England, and the Bank of Japan will also be involved in the interest rate debate – all keeping an eye on inflation.
The US Federal Reserve is expected to maintain its rate between 3.50% and 3.75%, according to the FedWatch tool from the CME Group. In Brazil, February's inflation of 0.70%, more than double the 0.33% observed in January, tends to diminish the chance of a 0.50 percentage point reduction in the Selic rate, currently at 15%. The possibility of a 0.25 percentage point cut remains. In practice, however, the Central Bank's view of the international scenario could justify any decision. Or even none at all.
However, maintaining the rate at its highest level in twenty years could force Gabriel Galípolo's Central Bank to explain itself to the Presidential Palace and the market, since lower interest rates encourage slower expansion of public debt and signal some relief to activity in a highly worrying scenario where large indebted companies are heading for bankruptcy.
