Central bank central bank criticizes cutting taxes to subsidize fuel

The Bank for International Settlements, considered the central bank of central banks, this Monday (27) disapproved of the strategy of countries like Brazil to try to lower taxes and subsidize products such as fuel to contain inflation.

For the president of the BIS, the Mexican Agustín Carstens, this type of measure ends up benefiting many people who do not need subsidies, as is the case with gasoline. “The most appropriate thing would be to reinforce programs [sociais] more focused, for those who really need help,” he said.

To try to circumvent the impact of inflation on the electoral campaign, President Jair Bolsonaro (PL) endorsed the use of almost R$35 billion in public resources to subsidize fuel. But his government keeps 700,000 families in extreme poverty (with a monthly income of up to R$105 per person) on the waiting list for the Auxílio Brasil program.

Another 65,200 families in poverty, with a monthly income of R$105.01 to R$210 per person, are also eligible for the program, but have not yet received the benefit.

The BIS warns that the current global inflationary surge could be persistent and lasting. In its annual report, the body says that transitions to high-inflation environments rarely happen, but are very difficult to reverse.

According to the BIS, many economies are already experiencing this, and recommended that central banks not be afraid to inflict even recessions on their economies (via rising interest rates) to avoid a persistently inflated world.

Questioned by Sheet in an interview about how to reconcile monetary tightening and economic slowdown with a situation of increasing poverty and hunger as in Brazil, Carstens recommended strengthening social programs.

For the BIS, it would be more harmful for the poor to allow high inflation to persist, eroding income on a daily basis, than to inflict short-term losses to control prices — hence the need to cushion the situation by reinforcing social programs.

Carstens praised the fact that the Brazilian Central Bank had started earlier than many central banks to raise interest rates to contain inflation; and admitted that the main international financial control bodies were wrong to consider that the shocks caused by the Covid-19 pandemic would be transitory.

“The impulse of monetary policies [juros baixos] and tax [mais gastos] taken to avoid deflation [queda de preços; e possível recessão] became very intense and proved to be wrong,” said Carsterns.

There was also an evaluation error, according to him, in considering that the interruptions in the production chains would be brief. “We thought the engines would shut down and restarting them would be easy,” he said of the slow and troubled resumption of global production.

The BIS says the world is now experiencing a deep and “inherently stagflationary (low-growth inflation)” shock due to higher commodity prices, supply chain bottlenecks and shortages stemming from Russia’s invasion of Ukraine.

“We may be reaching a tipping point, beyond which an inflationary psychology spreads and takes root. This would mean a major paradigm shift,” their report says.

Such a shift would end an era of relatively stable overall prices, with some products cheaper and others more expensive — in a context in which central banks could ignore temporary increases in oil or natural gas prices, for example, because inflation generally remained under control.