The noise generated by President Luiz Inácio Lula da Silva’s (PT) criticism of the Central Bank and the conduct of monetary policy has deepened the worsening of inflation expectations each week and pressured interest rates, having the opposite effect to that intended by the government in its speech .
The Focus bulletin, which captures the financial market’s perception of economic indicators, showed this Monday (6) that the projection for the IPCA (Broad National Consumer Price Index) for this year jumped to 5.78%, compared to 5 .74% in the previous week. It is the eighth week in a row that the survey brings an upward revision of the inflation index.
For 2024, the most relevant period for the BC’s performance today, the expectation also rose, from 3.9% to 3.93% – the third consecutive increase. For the basic interest rate (Selic), the estimate remained stable at 12.5% in 2023 and was 9.75% at the end of next year, against 9.5% in the previous week.
According to an estimate made by Luiz Fernando Figueiredo, former director of the Central Bank and chairman of the board at Jive Investments, Lula’s speeches could result in an additional cost in managing the public debt of around R$ 100 billion this year, if the yield curve remains above the level observed before the statements.
“It’s shooting yourself in the foot”, he sums up about the president’s statements. According to the economist, the president’s confrontation with the Central Bank is the main reason why long-term expectations are rising. The fiscal issue would go into the background, with economists fearing that Brazil does not have a sustainable fiscal policy.
“President Lula has been very vocal against monetary policy, against the Central Bank, even raising some doubt as to whether he agrees with the institution’s independence. This puts the BC’s ability to do its job at risk,” he says.
On Thursday (2), a day after the Central Bank raised the tone of its warnings about fiscal risks, Lula called the president of the institution, Roberto Campos Neto, “that citizen” and said that he may review the autonomy of the monetary authority – passed into law in February 2021.
“I want to know what independence was for. I will wait for this citizen [Roberto Campos Neto] end his term for us to make an assessment of what the independent BC meant”, said Lula in an interview with RedeTV!.
The BC’s formal autonomy has already been a target of Lula on other occasions. Weeks earlier, the president said he doubted that Campos Neto was more independent than Henrique Meirelles in his previous terms, between 2003 and 2010.
President of the BC in previous Lula administrations and Minister of Finance during Temer’s administration, Meirelles supported the BC’s formal autonomy project and defends its maintenance.
“We advanced to the point of operational autonomy and then we conquered legal independence, there is no reason to go back, because it will only create damage to everyone and to the country”, he says. “Withdrawing that is something that will completely erode expectations.”
For José Júlio Senna, former director of the Central Bank and head of the Center for Monetary Studies at Ibre-FGV, Lula should be “thankful and not revolted” by the institution’s autonomy. In his view, if it weren’t for that, the institution could have been used politically by the Jair Bolsonaro (PL) government in the electoral dispute against the PT.
“If it hadn’t had independence, the previous government would have advanced on the BC and forced a looser monetary policy that would help it in the election. I have zero doubt that this would happen”, he says.
The national president of the PT, Gleisi Hoffmann, has echoed Lula’s speech on social networks. “Lula is right in opening the debate on the BC’s decisions. Having a mandate does not mean not having responsibility for a country that urgently needs to grow. Who will invest in production and services when they can earn horrors with skyrocketing interest rates?”, She wrote .
A day earlier, she had already criticized the high level of interest rates in the country. Members of the government estimate that the higher interest has a higher cost than the budget of the Bolsa Família program, estimated today at R$ 175 billion.
Last week Lula reiterated his criticism of the current inflation target, lower than in his previous administrations, which left the market on alert about the possibility of revising the objective to be pursued by the Central Bank in its interest rate policy.
“Why don’t you do 4.5% like we did [nos mandatos anteriores]? The Brazilian economy needs to grow again,” Lula said in an interview with GloboNews.
The petista’s speech, however, has not yet mobilized a technical debate in the government for a change in the goal established by the CMN (National Monetary Council), as shown by the Sheet.
The politicization of interest rates reached the president of the TCU (Union Court of Auditors), who reacted in defense of the BC. “It’s not possible [o governo federal] talk about indebtedness and wait for the monetary authority to stand still, arms crossed”, said Bruno Dantas.
For Senna, it is time for Lula to work “less with rhetoric and more with evidence”.
“Resolving the problem of high real interest rates by attacking the Central Bank, attacking the institution’s independence and thinking about raising inflation targets are definitely counterproductive movements. Not only do they not help, but they hinder,” he says.
The former BC director considers that the new government is in a hurry to recover economic growth and show that it is leading the economy “very well”, given the polarized political environment. But he warns that there is no short-term solution.
“There is no alternative to the fall in real interest rates except through robust adjustments in public accounts, taking over the expenditure side and accompanied by a new fiscal framework for the medium and long term”, he says.
Despite having kept the basic rate (Selic) stable at 13.75% per year, the Central Bank signaled that interest rates may take longer to fall given the “particularly uncertain fiscal environment and with expectations of inflation moving away from the target in horizons longer”, which increases the cost of disinflation to reach the targets established by the CMN.
The messages given by the monetary authority provoked a wave of revisions in the projections of financial market agents. In addition to generating a surge in short-term rates, agents began to demand an even higher premium for long-term interest rates with the worsening risk perception.
Citi economists, faced with deteriorating expectations, began to estimate inflation and higher interest rates. The forecast for the Selic jumped from 10.5% to 12.25% at the end of 2023. “Overall, consensus inflation expectations are suggesting that analysts are already working with an inflation target that is, in fact, higher” , wrote economists Leonardo Porto, Paulo Lopes and Thais Ortega in a report.
In the Copom reference scenario, which is based on the Focus premise of cutting interest rates in the second half of the year, inflation projections rose to 5.6% for this year. For 2024, the board raised the forecast to 3.4%.
The BC included an alternative scenario, in which the Selic is kept constant throughout its period of operation, with inflation projections of 5.5% for this year and 2.8% for 2024.
The fiscal issue is seen with distrust by economists, who take into account the uncertainty regarding the design of the new rule that will replace the spending ceiling – a mechanism that limits public expenditure growth to the inflation recorded in the previous year.
The approval of the PEC (proposed amendment to the Constitution) that authorized the expansion of expenses this year is also pointed out by the market as a sign that the government may be predisposed to a more expansionist fiscal policy.
“The PEC has been discussed for a long time, it is not exactly a new thing, but it had to materialize. There is a certain inertia in updating expectations”, says Alexandre Schwartsman, former BC director, who sees the fiscal issue as main element for the deterioration of expectations added to the government’s communication noise.
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