Haddad says that the package of measures is a ‘letter to the Central Bank’

A persistent critic of interest rates in Brazil, Finance Minister Fernando Haddad (PT) said this Thursday (12) that the package of measures to improve public accounts by up to R$242.7 billion is a “letter to the Central Bank”.

The economic team expects that the reduction in the gap will be perceived by the monetary authority as an element of reducing fiscal risks, opening space for a reduction in the basic interest rate, the Selic, which is currently at 13.75% per year .

The fiscal issue has been precisely one of the preferred targets of BC warnings over the past year. The institution is presided over by Roberto Campos Neto, a name indicated by former President Jair Bolsonaro (PL), but who won a fixed term after Congress approved the institution’s formal autonomy.

In a press conference to present the measures, the Minister of Finance reaffirmed that fiscal and monetary policies need to act in harmony.

“This is the game we are learning to play. In the past there was no independence from the Central Bank, now it exists, we need to understand. In the same way that we are reading the Central Bank letter, the Central Bank will read our letter. This is a letter to the Central Bank, we are exchanging letters until the day we celebrate a greater understanding”, said Haddad.

The holder of the folder highlighted, however, that it is not up to the Minister of Finance to make an assessment of the BC’s performance. “I don’t have to be satisfied or dissatisfied with the Central Bank, I have to respect institutionality, respect the independence that was approved and seek ways to harmonize policies. Disharmony will not produce the best results,” he said.

The BC letter quoted by Haddad was released by Campos Neto on Wednesday (11) to justify noncompliance with the inflation target in 2022, for the second consecutive year.

In the text, the Central Bank reinforced the message given at the last Copom (Monetary Policy Committee) meeting, in December, that it would follow “with special attention” the developments of fiscal policy and its effects on asset prices, expectations of inflation, the degree of uncertainty in the economy and the neutral interest rate.

In addition to the BRL 231.55 billion deficit, which could significantly increase the public debt, doubts about the new government’s willingness to adopt measures to reduce the gap had been cited by the financial market as a factor of uncertainty for projections. —numbers monitored by the monetary authority in its discussions.

The BC itself sees the high uncertainty about the future of the country’s fiscal rules —whose proposal has not yet been presented by the new government— and additional fiscal stimuli as risk factors for rising inflation.

In an interview with Sheet, before the official announcement of the measures, the secretary of the National Treasury, Rogério Ceron, stated that the package of actions would create conditions for “a reduction in long-term interest rates”, which would allow the BC “to begin a process of reflection on the appropriate moment monetary policy relaxation”. “We have the highest real rate in the world again. We need to reverse it, supporting the BC in this process”, he said.

Expenditure containment helps to reduce demand pressures, which facilitates the fall of inflation and allows to cut interest rates more quickly.

The Copom ended 2022 with the Selic at 13.75% per annum. Despite the decision to keep interest rates unchanged for the third consecutive meeting, the BC warned that it would not hesitate to resume the cycle of monetary tightening if the disinflation process did not go as expected, and could adjust its future steps.

The market, which even projected the start of interest rate cuts in June, saw room for a Selic reduction only in the second half, given the instability scenario.

As shown to Sheetthe basic interest rate should reach in mid-2023 the most contractionary level in 20 years, since the beginning of the first Lula administration, according to estimates by the macroeconomic research area of ​​Banco Santander.

As there is a reduction in inflation estimates over the next 18 months –considering the lag of the effects of monetary policy on the economy– and the Selic rate is maintained at the same level, the real interest rate rises, and the level of monetary tightening becomes more strong.

The current level of interest rates in Brazil was classified as an “anomalous” situation by the Minister of Finance in a statement on January 3rd.

“We have the highest interest rate on the planet, the real interest rate, look at the paradox we are experiencing, it is a completely anomalous situation, comparatively low inflation and a real interest rate that is inappropriate for an economy that has already been slowing down,” Haddad told the Brasil 247 website.