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When regarding monetary correction and interest rates we address the issue of inflation. Without inflation, we would not need to correct values monetarily or apply extortionate interest rates like those still practiced in Brazil, especially when compared to other countries with a long history of control control. Indeed, Brazil faces distortions that are unimaginable in other countries, such as the interest rates charged by credit card operators, which impose fees that would be considered illegal elsewhere.
But what is inflation? According to the Central Bank of Brazil (BACEN), inflation is the increase in the prices of goods and services, which implies a decrease in the currency’s purchasing power. Inflation is measured by price indices, and Brazil has several such indices. The most commonly used in the inflation targeting system is the Extended National Consumer Price Index (IPCA).
Also according to BACEN, the causes of inflation rises can be summarized as (i) demand pressures (when there is an increase in demand for a good or service), (ii) cost pressures (when there is an increase in the cost of producing a good or for providing a service), (iii) inflationary inertia (the process in which past inflation is reflected in current prices, for example, in indexation) or (iv) inflation expectations (influenced by many variables, such as the unemployment rate, monetary policy, credibility, etc.).
Initiated in 1993, the Real Plan was a successful economic stabilization process in Brazil following numerous failures, such as the Bresser Plan and the Collor Plan. This plan allowed Brazil to achieve inflation control that most Brazilians had never experienced in their lifetimes.
Regarding contracts, the Real Plan brought a significant consequence. This was marked by the approval of Law #10,192, of February 14, 2001, which in Article 20 and its corresponding Paragraph 10 stated:
“Article 20 – It is permitted to stipulate monetary correction or adjustment by general or sectoral price indices or those reflecting the variation in production costs or inputs used in contracts with a duration equal to or greater than one year.
Paragraph 10 – Any stipulation for adjustment or monetary correction with a frequency of less than one year is null and void.”
Since then, contracts have been prohibited from including clauses that allowed adjustment using an indexer that corrected their value monetarily, more frequently than once a year.
Finally, on June 28, 2024, the Law #14,905 was sanctioned, which amended the Brazilian Civil Code to introduce new guidelines regarding monetary correction and interest rates. The following changes were introduced to said code:
It is important to note that the issue of interest in contracts was already regulated in Brazil’s legal framework long before the Real Plan. This occurred through the Executive Order #22,626, of April 7, 1933, which provided for interest in contracts, prohibiting the charging of interest above double the legal rate. However, this new law also altered this provision by excluding the following obligations from the scope of said executive order:
I – contracted between legal entities;
II – represented by negotiable instrument or securities;
III – contracted with:
a) financial institutions and other institutions authorized to operate by the Central Bank of Brazil;
b) investment funds or clubs;
c) leasing companies and simple credit companies;
d) civil society organizations of public interest referred to in Law #9,790, of March 23, 1999, which are dedicated to granting credit;
IV – carried out in the financial, capital, or securities markets.
Finally, lawmakers established a vacatio legis (interval between the date of publication of a law and the date it effectively comes into force) of 60 days, after which this will this law take effect.
