Campos Neto will have to explain in a letter to Guedes the blowout of the inflation target

In recent months, the president of the Central Bank, Roberto Campos Neto, has seen the institution’s stance in the fight against inflation being questioned by the financial market.

Responsible for bringing the basic interest rate (Selic) to a historic low of 2% a year in 2020, the current management is now the protagonist of one of the most intense monetary tightening movements in the history of the inflation targeting regime, implemented in 1999 —without yet achieving the necessary effect.

This Friday (10), the IPCA, the official inflation index, reached 10.74% in the 12 months ended in November. It is already clear that the result for the year will be far above the target defined by the CMN (National Monetary Council), which was 3.75%, with a tolerance interval of 1.5 percentage points up or down.

As determined by the law governing the target system, Campos Neto will have to send in early 2022 —after the release of the IPCA for the year—a letter to Economy Minister Paulo Guedes to explain why inflation is outside the target. , detail the procedures to adjust the course and define the deadline within which this will be fulfilled.

In the current administration, the executive coming from Banco Santander also underwent an important change in his position in the government. In April of this year, he was appointed for the term of the institution’s president until 2024, within the new legislation that gives autonomy to the BC and provides for fixed terms for its directors.

With the change, he lost the status of Minister of State, but gained the possibility of continuing at the head of the monetary authority until the end of the second year of the next government, whoever is elected in 2022.

The BC president also recently found himself in the middle of two controversies, one of them involving criticism of the conduct of monetary policy.

In October, it was revealed that he and the Minister of Economy have companies in tax havens, which generated a preliminary calculation filed by the PGR (Attorney General’s Office).

In the same month, a recording at a closed event at BTG Pactual showed the bank’s owner, André Esteves, reporting a conversation with the BC president, which took place about a year earlier, about the limit for lowering interest rates.

“I remember that interest rates were rising at around 3.5% and Roberto called me to ask: ‘Wow, what are you thinking, where do you think the lower bound is [limite inferior]?’ I said, ‘look Roberto, I don’t know where it is, but I can see it in the rearview mirror, because we’ve already been through it.’ At some point we thought we were too English and took this interest to 2%,” said Esteves.

The narrative had negative repercussions, and BC stated that, as a regulatory body, the members of the collegiate board “maintain periodic institutional contacts with executives from regulated and unregulated markets to monitor prudential issues that could threaten the stability of the financial system and/or for to gather views about the economic situation”.

André Esteves’ opinion about the BC having gone overboard is not an isolated case, but neither is it a consensus among economists.

as showed the leaf, Brazil followed the global movement to reduce interest rates in response to the pandemic in 2020 and was one of the first to review this policy, in March of this year, when inflation soared. Now, it already stands out with the biggest interest rate shock in nearly 20 years.

The price index in Brazil advanced much more than abroad and left the country among the three with inflation above 10%, considering the most relevant advanced and emerging economies.

An analysis of the Copom (Monetary Policy Committee) communiqués and speeches by the BC president and other directors during the period shows that the drop in interest rates was accompanied by a reduction in inflation projections, both by the institution and by the market.

Inflation expectations began to rise significantly in December of last year, but the BC argued that they were still below the 3.75% target for 2021. In late January, they came closer to that level, and the BC signaled that could raise interest rates soon.

At the next Copom meeting, at the end of March, BC estimates were already close to the limit of 5.25% —the market was still a little more optimistic about inflation—, which led the institution to begin the upward cycle. interest rate with an increase of 0.75 percentage point in the Selic.

Since then, the BC has promised several times to maintain the bullish pace, but has picked up the pace in two moments, bringing the rate quickly to the current 9.25% a year — with expectations of a new increase of 1.50 percentage point in January next year and another increase in March, which will take the Selic rate to more than 11% per year.

The Copom’s assessment of the appropriate level of interest rates also changed quickly in its communiqués, following the rise in prices: extraordinary stimulus was needed in January, some stimulus in the following meetings, neutral level in June, above neutral in August and contractionary as of of September.

The most recent discussion is whether there would be any exaggeration in the institution’s current posture, as shown by the leaf, given the stagnation of the economy and the lag between the rise in interest rates and its effects.

To a large extent, the difference between the rise in inflation abroad and in Brazil is attributed to an issue in which Campos Neto gained prominence this year: the discussion on fiscal policy.

President Bolsonaro and Congress, with the approval of the Economy Minister, are trying to find space to increase expenses in the election year. This week, Congress enacted the part of the PEC on Precatório that changes the calculation of the spending ceiling — the articles dealing with default on these debts are still under consideration in Congress.

Since the breaking of the ceiling became a fact, the economic scenario has deteriorated significantly, as noted by the BC itself, stating that “recent questions regarding the fiscal framework have increased the risk of unanchoring inflation expectations”.

In his presentations, Campos Neto usually uses a graph that shows the drop in the Selic rate since the implementation of the spending cap and the reduction in BNDES interest subsidies, changes adopted during the Michel Temer administration.

The executive also always emphasizes excerpts from the Copom communiqués about the need to keep public accounts under control — and anchored in the spending ceiling — so that it is possible to avoid further increases in interest rates.

The difference between the speech of Campos Neto and Paulo Guedes on the issue caught the market’s attention in this second semester. While the minister says that the fiscal is not out of control, the BC president says that the damage caused by the implosion of the ceiling is already permanent, creating an uncertainty that impacted the dollar, inflation and growth expectations.

“The government has to send a responsible message about what the fiscal trajectory will be going forward,” Campos Neto said in August of this year, a statement that was not well received by the government. Later, the BC president softened his tone and started to include in his presentations graphics that show improvement in the indicators of public accounts.

At the time, information circulated that Bolsonaro would have regretted giving autonomy to the BC, which was denied by the Planalto Palace. Inflation is one of the issues that most preoccupy the president’s reelection plans today. The BC president was even advised not to attend events with politicians who are part of the Bolsonaro government.

Campos Neto also adopted a speech on vaccination that clashes with the rest of the government, as he was one of the first high-ranking occupants to publicize an image of the moment he took the first dose — there were ministers who preferred to hide from the president that they had been vaccinated.

At the time he was nominated by Bolsonaro for the mandate he set for the BC, he was even quoted for the position of Minister of Economy, given the weakening of Guedes, who continues in that role until today.

Criticism of the Copom’s stance is nothing new in the targeting regime and sometimes comes from members of the government itself, as happened during the administrations of Arminio Fraga (1999-2002) and Henrique Meirelles (2003-2010) – vice president José Alencar Gomes da Silva (1931-2011) was one of those critics in the Lula government.

Antonio Tombini (2011-2016), on the other hand, was seen by the market as a leader subject to political interference from then-president Dilma Rousseff. His successor, Ilan Goldfajn (2016-2018) was also questioned. At the time, for not having cut interest rates at the end of the Michel Temer administration, when the economy was slipping after the 2014-2016 recession.

All BC commanders since 1999 have had to justify not meeting the inflation target. Campos Neto will join the list and try not to repeat the feat for two straight years.