Government does not discuss changing inflation target, despite criticism from Lula

Open criticism by President Luiz Inácio Lula da Silva (PT) of the current inflation target, lower than in his previous administrations, left the market on alert about the possibility of revising the objective to be pursued by the Central Bank in its policy of fees. The PT’s rhetoric, however, has not yet generated practical initiatives for change.

According to different government interlocutors heard by the Sheetso far there is no technical discussion for changing the inflation targets.

The issue entered the radar because Lula publicly criticized the targets set in recent years —the targets are 3.25% in 2023 and 3% in 2024 and 2025, with tolerance margins of 1.5 percentage points, more or less. The petista has also complained about high interest rates, which, according to him, contribute to the high indebtedness of families and hinder consumption.

“You set an inflation target of 3.7%. When you do that, you have to tighten the economy more to reach that 3.7%. Why did you need to do 3.7%? Why not 4.5%, like We did [nos mandatos anteriores]? The Brazilian economy needs to grow again,” he said in an interview with GloboNews on January 18.

The market’s fear is that the president will bet his chips on a higher inflation target in an attempt to push the Central Bank to cut the basic interest rate, the Selic, currently at 13.75%. This would be one of the few ways for the PT to exercise some influence over monetary policy, since the BC has autonomy guaranteed by law.

The central point of the debate is whether the eventual change would have the expected effects, since raising the target could convey the message of a government that is more lenient with price increases.

In this scenario, economic agents would feel encouraged to pass on readjustments, in the expectation that their own costs will increase, further boosting prices —which have already grown at an accelerated pace. Last year, inflation exceeded the target for the second consecutive year, closing at 5.79%.

During the campaign, the issue of the inflation target was even discussed in the technical groups of the Perseu Abramo Foundation, linked to the PT. The starting point was the critical look at the recent decrease promoted since the government of Michel Temer (MDB).

According to interlocutors, the party’s own economists recognized that, once the inflation target is reduced, it is difficult to return to a higher level, under the risk of messing up the expectations of economic agents.

Amidst the growth of the debate, members of the Lula government report to the report that they are attentive to the criticisms made by the market. Political allies of the president, in turn, see the possibility of the PT using the speech more as a political flag.

The inflation target is defined by the CMN (National Monetary Council), formed by ministers Fernando Haddad (Finance) and Simone Tebet (Planning and Budget) and by BC president Roberto Campos Neto. Formally, the definition of the objective depends on the three votes.

In the CMN’s usual schedule, the theme is discussed in the June meetings, always a few years in advance. This year, for example, the forecast is to define the inflation target to be pursued in 2026.

However, nothing prevents the subject from being discussed before June, if it is guided by one of the members of the collegiate. The first meeting of the CMN is scheduled for February 16, after the January meeting was canceled due to the lack of resolutions to be evaluated or approved, according to the bodies involved.

One of the formulators of the inflation targeting regime adopted in Brazil in 1999, the economist Sergio Werlang, former director of Economic Policy at the BC, is one of the few defenders of the adoption of a higher inflation target in the coming years, around 4 % or 4.5%.

According to him, a low target “demoralizes the system”. “You end up putting a number that is not feasible, which forces the BC to be very conservative, raise interest rates a lot. And, more than anything, even doing that, it often makes mistakes”, he says.

He also argues that the objective of around 3% is too low for the capacity of the Brazilian economy, although other emerging countries, such as Chile, adopt this same parameter.

“These more organized emerging countries have a much better fiscal structure than Brazil’s, it is much easier to balance the budget in these countries. The debt/GDP ratio [Produto Interno Bruto] it is much more contained than in Brazil, here there is a very high rigidity in fiscal spending”, he says.

Werlang defends that the CMN repeat the formula of adjusted targets used in 2003, at the beginning of the first term of the Lula government, when the target to be pursued by the BC was made more flexible in 2003 and 2004 to follow the trajectory of projected inflation for the following years — pressured by an expressive appreciation of the dollar and cost transfers.

A new change now, in his assessment, is necessary for the target system and the monetary authority itself to regain the credibility scratched by the recent bursts —which has a chance of repeating itself in 2023.

“If this transition is not done well, it can be worse than keeping it the way it is. But, if it is done well, it gains credibility back.”

Henrique Meirelles, former president of the Central Bank (during Lula’s government) and former finance minister (during Temer’s administration), is opposed to the idea of ​​a possible revision based on adjusted targets, arguing that the Brazilian inflationary problem is no longer structural, as in the past.

“At that time, with a lack of reserves and a very high dollar, it was necessary to accumulate reserves and a gradual drop in the inflation target at the same time. This led us, therefore, to set gradual targets”, he says.

“Today, Brazil does not have an exchange rate problem, inflation is a matter of expectations of economic agents due to fiscal problems.”

Meirelles was one of the drivers of the process of reducing inflation targets in the Temer government. Defender of the measure, he claims that it is “more important than ever” not to change the target to be pursued “so that the BC can control these expectations and bring inflation to the target”.

Meirelles considers that Lula’s possible reasoning in defending a target around 4.5%, allowing for higher inflation, is to make room for a faster drop in interest rates and greater growth in the country.

“If this is [raciocínio], it won’t work like that. As the inflation target changes, we will deteriorate expectations, create more insecurity, create more problems and force the BC to be even tougher.”

Tony Volpon, former director of International Affairs at the Central Bank, also sees any easing of the inflation target as negative. “Perhaps having put 3% was a mistake, but this is not the time to change”, he says.

For him, any gains from the change would be canceled out by a negative reaction from the financial market. “There would be a readjustment of the rates [de juros] nominal rates in such a way that the real rates would be even more pressured due to the loss of credibility”, he says.

Another economist who considers a possible increase in the inflation target counterproductive is Heron do Carmo, a professor at FEA-USP (Faculty of Economics, Administration, Accounting and Actuarial Science, University of São Paulo). He recalls the country’s inflationary history, sees the measure as a factor of worsening expectations and considers that it will be “very costly” to regain control.

The president of the BC, Roberto Campos Neto, has already said on more than one occasion that any change in future targets is not a decision that rests with the monetary authority alone, but he stressed that a decision in this sense would not bring gains for action in the fight against inflation .

“The BC has one vote within three of the CMN. This can be debated at the CNM, but the BC’s opinion today is that it would have little to gain in terms of credibility”, said Campos Neto in March 2022.

Werlang, in turn, recalls that the format of the target system was designed so that the monetary authority would be the minority voice, precisely because the Central Bank and its members tend to be “more conservative” in terms of inflation.

“The system was designed so that the decision on the inflation target was outside the BC, so that the BC had something to say, but that it was not the determining voice”, he says.