BC sees debate on inflation target as one of the reasons for worsening expectations, shows minutes

With “special concern” in the face of worsening inflation expectations, the Copom (Monetary Policy Committee) of the Central Bank analyzed the effects of a possible change in the target established by the CMN (National Monetary Council) and of an expansionist fiscal policy, according to the minutes released this Tuesday (7).

“Such deterioration [de inflação de prazos mais longos] may have occurred for several reasons, highlighting, among these factors, a possible perception of Central Bank leniency with the targets stipulated by the National Monetary Council, an expansionary fiscal policy, which puts pressure on aggregate demand over the horizon of projections, or the possibility of changing the inflation targets now defined”, say the authorities in the document.

In recent weeks, Lula has publicly criticized the inflation 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 and attacked BC president Roberto Campos Neto, whom he called “that citizen” last week.

On the other hand, the BC collegiate stated that, although it only works in its scenarios with policies already implemented, the execution of the package that promises a fiscal improvement of R$ 242.7 billion, announced by Minister Fernando Haddad (PT) on 12 January, could reduce the pressure on inflation.

Last Wednesday (1st), the BC maintained the basic interest rate at 13.75% per annum for the fourth consecutive time, in the first meeting since President Luiz Inácio Lula da Silva (PT) took office.

Regarding the Central Bank’s perception of complacency with the targets to be pursued, the monetary authority reaffirmed its commitment to achieving the targets. “[O BC] assesses that, once the discouragement is observed [piora da percepção dos analistas do mercado financeiro]it is necessary to remain even more attentive in the conduct of monetary policy to re-anchor expectations and thus reduce the future cost of disinflation”, he added.

As for the expansionist fiscal policy, the collegiate pondered that the evaluation of demand stimuli should consider the stage of the economic cycle and the degree of idleness in the economy, emphasizing that the interest rate policy is the adjustment used to mitigate possible inflationary effects.

Regarding the possible change in inflation targets, the BC said that “more important than the analysis of the motivations for raising expectations, the committee emphasizes that it will act to ensure that inflation converges to the targets”.

On Monday night, Haddad stated that the BC’s warnings about the fiscal situation refer, above all, to the legacy left by the Jair Bolsonaro (PL) government for the current administration, but that the monetary authority could have been “a little more generous ” after the measures announced by the PT administration to improve public accounts.

In the minutes, the Copom praised the package presented by the economic team of the Lula government, although it emphasized that it only considers in its scenarios policies that have already been incorporated.

“Some members noted that the medians of the primary deficit projections of the Pre-Copom Questionnaire (QPC) and the Focus survey for the year 2023 are significantly lower than the forecast in the federal budget, possibly incorporating the fiscal package announced by the Ministry of Finance “, he said.

“The Committee maintained its usual governance of incorporating policies already approved by law, but recognizes that the execution of such a package would attenuate fiscal stimuli on demand, reducing the risk of an increase in inflation”, he added.

In the statement shortly after the meeting, the BC collegiate had raised the tone with warnings about fiscal uncertainties and the worsening of inflation expectations, which are moving away from the target in longer terms. The committee also signaled that it may leave interest rates at the current level for longer – the financial market predicts the beginning of monetary easing for September.

The messages provoked an increase of tension in the monetary authority’s relationship with the government, generating an escalation in the criticism fired by President Lula against the BC.

During the inauguration of the new BNDES president, Aloizio Mercadante, in Rio de Janeiro, on Monday (6), Lula said that the country’s current basic interest rate is “a shame”.

“There is no justification for the interest rate to be at 13.50% [o patamar da Selic está, na verdade, em 13,75%]. Just look at Copom’s letter to let us know that this interest rate increase is shameful,” he said.

For Planalto allies, Campos Neto burned bridges with the PT government and reduced his chances of influencing the appointment of new directors of the autarchy – the autonomy law, approved in 2021, gives the prerogative to the President of the Republic. The next exchange is scheduled for February 28, when the terms of two members end.