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Thursday, July 7, 2022
HomeEconomyRaising inflation targets would affect BC's credibility, say economists

Raising inflation targets would affect BC’s credibility, say economists

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Re-raising inflation targets would generate distrust, affecting the credibility of the Central Bank due to insignificant gains. This is the opinion of a large part of the market before the next meeting of the CMN (National Monetary Council), this Thursday (23).

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At the meeting, the collegiate body will define the inflation target to be pursued by the BC in 2025, in addition to ratifying or readjusting the objective set for 2023 (3.25%) and 2024 (3%).

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The CMN is currently chaired by Minister Paulo Guedes (Economy) and comprises the president of the BC, Roberto Campos Neto, and Esteves Colnago, special secretary for the Treasury and Budget of the Ministry of Economy.

According to economists interviewed by the Sheetthe trend is for the council to set a 3% target again in 2025, despite the high probability of an inflation target breach for two consecutive years — and with a third threatened.

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Luiz Fernando Figueiredo, former director of the BC and founding partner of Mauá Capital, defends maintaining the target at a level equivalent to that practiced by international peers, even if the current inflationary scenario is unfavorable.

“3% is an emerging country inflation. For Brazil, it is a challenge, but a good one. [Voltar a subir a meta] it’s a bad sign, it ends up having a cost that you don’t need”, he said.

In the 12-month period up to May, the IPCA (Broad Consumer Price Index) reached 11.73%. The BC estimate for 2022 inflation is 8.8%, while the median of the Focus survey is 8.5% for this year. In both cases, expectations are already far from the target ceiling (5%). In 2021, the IPCA reached 10.06%.

For 2023, the BC and the Focus bulletin project inflation of 4% and 4.7%, respectively, already touching the limit of the tolerance interval (4.75%).

And estimates are still likely to deteriorate, as tax measures on fuel, electricity and telecommunications prices pending in Congress could reduce inflation in the short term, not enough to meet the target in 2022, and raise it by smaller magnitude next year, to the point of perhaps causing a new burst.

Still, Ana Madeira, chief economist for Brazil at HSBC, believes that a change in direction would now bring “more noise than anything else”. “It is important for the credibility of the Central Bank to maintain the same levels, the same goals,” she said.

Sérgio Machado, founding partner and manager of SF2 Investimentos, emphasizes the value of communication so that the BC preserves the market’s confidence in its performance: “The consistency of the speech is more important than the action itself”.

Andrea Damico, chief economist at Armor Capital, also considers that this is not the ideal time to announce changes to inflation targets. For her, the margin of tolerance is already a sufficient mechanism to deal with atypical inflationary shocks.

“It is not an appropriate time to change the target when we need to re-anchor the long-term market expectations, which are very deteriorated. It will be seen as a password to suddenly tolerate higher inflation at the expense of a scenario of price stability more perennial. The system already has enough flexibility”, he said.

The inflation targeting system was adopted in 1999 to provide security to society about the direction of the economy, avoiding the risk of hyperinflation that hit the country in the 1980s and 1990s.

The objective is set by the CMN three calendar years in advance in order to reduce uncertainties and improve the planning capacity of families, companies and the government, according to the BC.​

The target serves as an anchor for the expectations of market agents and, since 2019, has been reduced by 0.25 percentage point per year to reach 3%, in line with other emerging economies.

Marco Maciel, partner and economist at Kairós Capital, points out that the CMN seeks to keep the inflation target as low as possible because of international standards, even though market expectations for the coming year show that there is little belief in the convergence of inflation to the target center.

“It is necessary to place our center of the goal in line with the rest of the world, otherwise we pay the price either in the exchange rate or in the view of the competitiveness of the Brazilian economy,” he said.

Another expert who points out the reflection on the competitiveness of the Brazilian economy is Margarida Gutierrez, professor at Coppead/UFRJ (Institute of Graduate Studies and Research in Administration, Federal University of Rio de Janeiro).

“If our inflation is higher than that of our emerging peers, this takes away the competitiveness of our exports and generates a series of harmful effects on the industry,” he said.

The economist considers that it is not yet time to resort to the “adjusted target”, a resource used by the BC in 2003 and 2004, when Henrique Meirelles was president of the monetary authority.

“The Central Bank can use the criterion of the adjusted norm, but not all the time. This discredits the inflation targeting regime. The main objective of the targeting regime is to anchor inflation expectations, for that it needs credibility,” he said.

According to Rafael Cardoso, chief economist at Daycoval Asset, a possible increase in the inflation target for 2025 would be a difficult discussion to address. “Is it worth the risk of you generating this friction in communication to gain 0.25 in the inflation target?”, he pondered.

He observes that this movement would only become less costly if the discussion in society gained new contours. “Let’s suppose that we enter a world that becomes a macroeconomic consensus that the inflation target has to be higher, then it changes the game”, he said.

For Adalmir Marquetti, a professor at PUC-RS (Pontifical Catholic University of Rio Grande do Sul), this paradigm shift may not be so far away. The War in Ukraine translated into new inflationary shocks around the world at a time when the economy was still recovering from the effects of the Covid-19 pandemic.

The conflict provoked a reorganization in the global productive chains and, consequently, an increase in prices in both emerging and developed economies until a new equilibrium in the production system is established.

“We are now going to live with higher rates of inflation. This also forces the BC to rethink the establishment of inflation targets. In the next two years, this will place more limits on economic growth,” he said.

The BC president, Roberto Campos Neto, has said on more than one occasion that changing future targets is not a decision that belongs only to the monetary authority, in addition to not bringing gains to the autarchy’s actions in the fight against inflation.

“The Central Bank has one vote within three votes of the CMN. This can be debated at the CNM, but the Central Bank’s opinion today is that it would have little to gain in terms of credibility”, commented Campos Neto, in March.

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