(Bloomberg) — There are few, if any, leaders in the world who publicly attack central bankers more than Brazil’s President Luiz Inacio Lula da Silva.

The reasons are increasingly evident as Brazilians feel the consequences of a weakened economy. Nine months after the Selic reached 13.75%, the peak of a rapid series of interest rate hikes, household debt remains at record levels, banks cut credit and cases of company failures grow.

Much of this discomfort is the result of the monetary policy led by the president of the Central Bank, Roberto Campos Neto. Without this tightening, he and the other members of the Central Bank’s board assess, demand will not cool down enough to bring inflation to the target.

For Lula, however, this is absurd. He has repeatedly taken aim at Campos Neto in his speeches, accusing the former bank executive of stunting the country’s growth by making it too expensive for Brazilians to borrow money.

The friction between the two sheds light on a growing risk to the global economy. The Central Bank of Brazil may have raised rates earlier and to a higher level than other monetary authorities, but almost all of them—from the Federal Reserve to the Bank of England—raised rates to uncomfortably high levels for politicians.

Calls for an end to rate hikes have been growing in capitols from Nairobi to Bogota and New Delhi, threatening to undermine the autonomy that is so critical to the monetary authorities’ fight against inflation.

“The truth is that inflation will take longer to come down here, and it’s taking longer to come down practically everywhere,” said Silvia Matos, an economist at the Getulio Vargas Foundation. “Super-tight global monetary policy has created an environment more susceptible to disagreements between governments and central banks. It’s a relationship that can be more conflicted.”

Tight on all levels

In Brazil, tension is evident at all levels of the economy – from consumers to chief executives. That makes it easier for the 77-year-old Lula, whose political career spanned presidencies and prison sentences, to blame Campos Neto.

Although inflation has already dropped more than half from last year’s peak of 12% – it reached 4.2% in April – economists are divided on whether the cooling will continue. This uncertainty leads the Central Bank to maintain the basic rate at the highest level in more than six years.

High borrowing costs are among the reasons why household debt is at an all-time high and automakers are closing production lines to avoid oversupply. The average interest rates on personal and home loans in the country are 42% and 11%, respectively.

It has become harder to take credit at the corporate level, too. Campos Neto’s rate hikes made the domestic debt market more costly even before dollar bond markets were cooled by the Fed’s most aggressive tightening cycle in a generation. Issuance by Brazilian companies — both in the local and international markets — plummeted.

There have been fewer than 90 bond issues by domestic companies this year through mid-May, most of them in reais, which totals about $11 billion, according to data compiled by Bloomberg. That represents a 51% drop compared to the same period a year earlier, the data shows.

“The feeling that interest rates are high and may remain high for a while generates a lot of uncertainty,” said Leonardo Ono, partner and private credit manager at Legacy Capital, which has BRL 35.8 billion in assets under management. “Companies will have to deal with this tightening in interest rates for a longer time and, in a scenario like this, the situation of cash flow and balance sheets is worse.”

Banks are also reducing credit, fearful of taking on more risk exposure after Americanas’ R$20 billion accounting hole, which led to a shocking bankruptcy filing. After being hit by defaults last year, Bradesco said the moment is cautious given the high interest rates. Santander Brasil is still recovering after a 50% drop in profits in the first quarter.

This causes companies to seek support from unexpected sources. Minerva’s financial director (BEEF3), Edison Ticle, said earlier this month that the beef exporter burned cash to help finance some of its suppliers who sought financing on their own.

“We need to replace the banks in financing our chain,” he said in an interview.

corporate difficulties

The number of bankruptcy filings filed by Brazilian companies in the first four months of the year increased by 34.1% compared to the same period of the previous year, according to Serasa Experian, a company that analyzes corporate and economic data. As Daniel Pegorini, CEO of Valora Gestão de Investimentos, suggests, it was mainly high interest rates that may “has accelerated the demise of companies that already had problems”.

“There will be no short-term quick fix,” said Alberto Serrentino, vice president of the Brazilian Society of Retail and Consumption. “We need the perspective of cutting interest rates and the normalization of the private credit market so that companies can breathe.”

Toymaker’s Dilemma

Not even during the pandemic, said Marcelo Cardoso de Sá, founding partner of midsize company Light Toys, were things this bad. One of the main customers of the manufacturer, Marisa (AMAR3), failed to pay a BRL 2 million bill – a huge amount for a stuffed animal manufacturer with 400 employees.

To keep the business going, Cardoso sought financing to cover the default, but the three bank offers he received were so expensive that he had to take out a personal loan to bring the fee down to a level he could afford.

“Our business has suffered,” he said, “but we continue to work with optimism.”

Marisa, the fashion retailer, had been in negotiations with its own creditors for months before it finally stopped paying Light Toys. A Marisa representative said the company is talking to its suppliers to find a solution. The toy maker is still waiting for your payment.

hold the stride

The more Brazilians are affected by economic conditions, the more emboldened Lula becomes — he began to single out Campos Neto in his tirades — and the more dangerous becomes the struggle to keep the Central Bank free of the kind of political meddling that has caused so much economic damage in the country. past.

Even so, it is likely only a matter of time before inflation eases enough for the monetary authority to loosen its grip on the economy. Brazilian traders evaluate the potential start of interest rate cuts towards the end of this year.

For now, however, Campos Neto is not backing down.

He has defended the autonomy of the Central Bank, which was only officially sanctioned in 2021, and firmly advocated for inflation targets. While everyone wants lower interest rates, he argued, the consequences of skyrocketing prices would be much worse, especially in a country with a history of hyperinflation.

The Copom did not mention future interest rate cuts in the communiqué and minutes of the most recent meeting. Instead, the authority’s directors said they were concerned about expectations of reaccelerating inflation. In the opinion of Campos Neto and his team, core inflation measures that eliminate more volatile items – such as food and energy – and analysts’ expectations for inflation need to decrease before the Selic can be reduced.

Lula, days after the decision, returned to criticize Campos Neto.

“He has no commitment to Brazil,” said the president. “Shopkeepers, businessmen, Brazilian workers can no longer support this interest rate.”

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