Lula and PT stumble over arguments when criticizing the Central Bank

In addition to putting pressure on inflation expectations and the interest rate curve, causing a reverse effect to the intended one, the statements made by President Luiz Inácio Lula da Silva and the PT against the Central Bank (BC) have been permeated by inaccuracies and exaggerations.

Despite the fact that the monetary authority makes more references to the fiscal area now than under Bolsonaro –more so than during the first year of the Covid-19 pandemic, when public accounts registered an unprecedented gap–, citations to wrong numbers, complaints that the autarchy supposedly remained silent in the previous government and the disregard for the inflationary risk in the artillery against interest rates represent stumbling blocks that undermine the party’s discourse.

The president of the PT, Gleisi Hoffmann, said in recent days that the BC didn’t make “a peep” last year about the increase in spending by the Bolsonaro government in the midst of the electoral race. But the decisions of the BC’s Monetary Policy Committee (Copom), led by Roberto Campos Neto, and the minutes of the meetings show the opposite.

“The published note [pelo Copom sobre a decisão de manter juros e que cita o cenário fiscal] is much more critical of the government than it was last year, when the Central Bank did not make a peep about Bolsonaro’s budgetary exploits to get re-elected,” said Gleisi on a social network.

In fact, throughout 2022 the BC made different warnings about the fiscal scenario, to the point of generating complaints from the then Minister Paulo Guedes (Economy), and even raised five times the interest rate (from 9.25% to 13.75% %, percentage seen to date). Since the beginning of that year, the Copom even repeated the risks that the expenditure ceiling ran.

“The Committee reinforces that uncertainty about the future of the country’s fiscal framework and fiscal policies that sustain aggregate demand may bring an increase in risk to the inflationary scenario and to inflation expectations”, stated the Copom in June, for example.

The following month, a PEC (proposed amendment to the Constitution) was enacted by Congress in the interest of the Bolsonaro government to boost social benefits in the midst of the electoral race until the end of that year. The then president was in second place in the dispute and the measures could help his popularity among the poorest population, traditionally more willing to vote for Lula.

The measure increased government spending by BRL 41 billion in 2022. The value of the Brazil Aid was increased from BRL 400 to BRL 600, the Gas Aid was expanded, benefits were created for truck drivers and taxi drivers and other measures were released.

As time went by, new comments were inserted into BC texts. In August 2022, amid growing speculation about the continuation of new expenses, the Copom considered that their extension could “increase the country’s risk premiums and inflation expectations as [tais medidas] put pressure on aggregate demand and worsen the fiscal trajectory”.

After Lula’s victory, what can be seen in the Copom texts is that the warnings made about the fiscal scenario intensified.

In 2022, the Copom referred to the words “fiscal” and “fiscal” a maximum of 5 times in each Copom minutes until September. In October, shortly before the election results, there were 7. In December, after Lula’s victory, mentions doubled to 14 and, in the most recent (February), there were 15.

Until then, the highest number had been in December 2020, when the government reached a historic shortfall of BRL 743 billion in the year due to measures to face the Covid-19 pandemic and its effects (there were 11 mentions).

In the document from the end of last year, the Copom turned to the new government, adding to the text excerpts in which it said it was following “future developments in fiscal policy and their potential impacts on the dynamics of prospective inflation”. In addition, he said that there was “a lot of uncertainty about the prospective fiscal scenario” and that the moment demanded “serenity in risk assessment”.

He also said that the impact on inflation resulting from significant fiscal stimuli “tends to overlap with the desired impacts on economic activity”. And it also raised the risk of reversal of reforms, which, for the Copom, could result in “a less efficient allocation of resources” and “reduce the power of monetary policy”.

With some variations, the Copom maintained and even raised the tone of warnings in the most recent minutes, released in February – but added an excerpt in which it mentions the fiscal package presented by the government to improve public accounts. The move was interpreted by Minister Fernando Haddad (Finance) as a friendlier message than what had been observed until then.

“The committee […] recognizes that the execution of such a package would attenuate fiscal stimuli on demand, reducing the risk of high inflation”, said the Copom. announced by Haddad.

Although the tone at each moment can be discussed, the minutes show that the concern with the fiscal scenario is present in Copom’s messages over the last few years.

The series of public messages exchanged between PT and BC continues. On social networks, Gleisi recently said that “the large economies control inflation without raising interest ratesminus Brazil”. In fact, more than 40 countries raised interest rates to contain inflation throughout 2022.

Among them, the United States, whose most recent movement took place this month – when the Federal Reserve (American central bank) raised its interest rate by 0.25 percentage points. Although the move marks a return to slower increases, the benchmark rate is now between 4.5% and 4.75% – the highest level since September 2007.

Lula himself has committed a series of inaccuracies in the debate. This month, he criticized the BC for “this interest rate hike” – even though the rate was raised before the elections (in August 2022). The percentage has remained unchanged since then (after four Copom meetings).

Lula has also stated twice that the interest rate is at 13.5% (when the correct one is 13.75%). He also complains that an inflation target of 3.7% has been established, which he considers to be excessively low (in fact, this year’s target is 3.25%; and the target of 3.75% was set for 2021).

When criticizing the BC’s autonomy, the President of the Republic has also said that the country could “not even have interest”. Zero or negative real interest is a possibility in some more developed economies, but a reality still difficult to achieve in a country like Brazil – which has a credit market under significant default, is pressured by inflation and is experiencing a fiscal scenario of distrust .

Real or negative interest would also have its complexities. Despite initially encouraging companies and people to withdraw money from banks so that they can earn in other types of investments, boosting activity, some economists see side effects, such as for the banking system –on which the economy also depends.

In the barrage of attacks on the president of the BC for the level of interest, the PT points its fingers at the monetary authority, largely ignoring the existing inflationary pressure in the country due to different factors —among them, those that depend on the government and that could help to reduce scenario uncertainties.

On the list are the decision on fuel taxation, the effective implementation of the package of measures to improve public accounts and the presentation of the proposal for the new fiscal framework that will replace the spending cap.