Economic team evaluates change in inflation targets, but makes reservations about results

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The economic team is evaluating the possibility of raising the inflation targets already established amid pressure from President Luiz Inácio Lula da Silva (PT) on the Central Bank for lower interest rates, but has reservations about possible changes. One of the considerations is that this year’s review would not have a practical effect on monetary policy in the short term.

The current targets are 3.25% in 2023 and 3% in 2024 and 2025, with tolerance margins of plus or minus 1.5 percentage points. The target is considered “unfeasible” by the national president of the PT, Gleisi Hoffmann. Lula, in turn, sees the level of 4.5% as ideal, the same level set in his first two terms.

An upward revision of the objective to be pursued by the BC in 2024 would make room for the beginning of the interest rate cut to be anticipated – today the basic rate (Selic) is at 13.75% per annum. In the government, there is a fear that high rates will compromise economic growth.

The government’s economic team ponders, however, that any change in monetary policy takes up to 18 months to have full effect on the economy. That is, a slight change in the target would not cause a reduction in interest rates in the short term and the impact on inflation would only be felt in 2024.

The secretary of Economic Policy at the Ministry of Finance, Guilherme Mello, said this Friday (10th), at an event promoted by Bradesco Asset Management, that the portfolio did not discuss a change in inflation targets in its technical bodies, but suggested that the debate is valid amid high global inflation.

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 topic is discussed at the June meetings, three years in advance. In 2023, for example, the forecast is to define the inflation target to be pursued in 2026 and ratify that of previous years. Technically, to change the targets already set, the government will need to edit a decree authorizing this change.

But the subject can be put up for discussion before June, if it is guided by one of the members of the collegiate. The first meeting of the CMN under the Lula government is scheduled for next Thursday (16). According to members of the economic team, the agenda has already been defined, without discussing inflation targets. However, nothing prevents the topic from being included — even in an extraordinary way by the president of the collegiate (in this case, Haddad).

If the government takes the issue to the CMN, Campos Neto has already signaled that he will technically discuss the possible revision of future inflation targets.

In the minutes of the Copom (Economic Policy Committee), released last Tuesday (7), the BC pointed out that “it conducts the monetary policy based on the targets stipulated by the National Monetary Council”. “In summary, 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”.

The president of the BC has said on previous occasions that any change is not a decision that rests with the monetary authority alone, emphasizing that a measure 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 the president of the monetary authority in March 2022.

In the view of analysts, raising the target could convey the message of a government that is more lenient with rising prices, raising doubts whether the eventual revision would have the effects desired by the government. The president’s criticism of the BC’s conduct has raised inflation projections and pressured interest rates.

The inflation projected by the financial market for 2023 in the Focus bulletin last Monday (6) is 5.78%, more than one percentage point above the target ceiling to be pursued by the BC (4.75%). BC calculations point to an inflation of 5.6% in 2023. This would represent an overrun of the target for the third consecutive year.

Inflation was above the target ceiling both in 2021 and in 2022. In an open letter addressed to the Minister of Finance, Campos Neto listed five factors for the target to exceed last year, such as inflation inherited from the previous year, high prices for commodities and in demand for services and employment after the reopening of the economy.

For 2024, the most relevant period for the BC’s performance today, the market’s expectation for the IPCA (National Broad Consumer Price Index) rose to 3.93% –already above the central target (3%). The Central Bank raised the forecast to 3.4%.

In an alternative scenario, in which the Selic is kept constant at the current level for a longer period, the Copom’s inflation projections are 5.5% for 2023 and 2.8% for 2024.


GOAL CHANGE

Who sets the inflation target?

The CMN (National Monetary Council), made up of the Minister of Finance (Fernando Haddad), the Minister of Planning (Simone Tebet) and the President of the Central Bank (Roberto Campos Neto). Each board member is entitled to one vote and decisions are taken by simple majority.

When is the inflation target usually set?

A 1999 decree establishes that inflation targets must be defined by June 30, three years in advance. That is, in June 2023, the 2026 target would be defined. To change the objectives prior to 2026, the Presidency of the Republic would need to publish another decree to create this possibility.

Who would take the goal change agenda to the CMN?

According to the CMN regulations, published in the form of a 1994 decree, the body’s president –the Minister of Finance (in this case, Haddad)– defines the agenda of matters to be discussed at each meeting. He can also approve the inclusion of extra-tariff matters when they are of an urgent nature, of relevant interest or of a confidential nature.

Can other members contest the agenda?

They may request views of a subject on the agenda or presented outside the agenda, abstain from voting on any subject and request the postponement of the voting on subjects.

Has the lower-term goal change been done before?

Yes, on at least two occasions. In 2002 and 2003.

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