Director says BC must fight shocks that impact inflation target

One day after the release of the minutes of the Copom (Monetary Policy Committee), the director of monetary policy at the Central Bank, Bruno Serra, said that the municipality has a duty to combat shocks that impact the inflation target in the relevant horizon.

According to him, the BC’s objective is not to give an opinion on public policies that are the responsibility of Congress and the Executive. “We only have to say how certain decisions can influence our ability to deliver inflation at the center of the target on the relevant horizon”, he said this Wednesday (9), in live from the Modalmais bank.

“If the price is not sustainable and there is a forecast that it will have to return to normal in the following year or in two years, the impact for monetary policy is negative. We are looking at 18 months ahead,” he said.

The document, released by the BC on Tuesday (9), was classified by some financial analysts as ‘message minutes’, with a warning about fiscal policies.

Without making direct reference to the Fuels PEC, the BC expressed concern that proposals to reduce fuel taxation in the election year could have a negative effect on the exchange rate, leading to higher inflation and, consequently, the need for a base interest rate even higher.

“The Committee notes that even fiscal policies that have a downward effect on inflation in the short term can cause deterioration in risk premiums, an increase in inflation expectations and, consequently, an upward effect on prospective inflation,” the minutes said.

In a questionnaire before the Copom meeting, which serves as a subsidy for the collegiate’s decision on the basic interest rate, 69% of the economists consulted evaluated that the fiscal situation in Brazil has worsened since the last meeting, in December, until now.

For 22% of market respondents, there was no relevant change in the fiscal scenario in the period, while 10% say it has improved.

This Wednesday (9), Bruno Serra also said that the battle against inflation in 2022 – still in double digits – is far from being won, showing concern about the effect of current inflation on future prices.

In the accumulated in 12 months, the IPCA (Broad Consumer Price Index) was 10.38%. Number far from the inflation target pursued by the BC, of ​​3.50%, with a tolerance of 1.5 percentage points up and down, and can reach 5%. The hike forecast by the monetary authority is 5.4%. If the estimate is confirmed, it will be the second consecutive year of overflow.

The BC’s monetary policy director pointed out, however, that this does not go against the idea of ​​reducing the pace of tightening in the next meetings, taking into account the lag in the effects of monetary policy. According to him, the impacts on activity are expected in six months and, after that, they occur in inflation. The effect on the price index occurs after about 18 months.

Last week, the Central Bank’s Copom raised the basic interest rate by 1.50 percentage points, from 9.25% to 10.75% per year. In March 2021, the Selic rate was at 2% per year, the lowest level ever.

The director also pointed out that the monetary tightening cycle should be more contractionary than projected in the so-called reference scenario, which predicts Selic of 12% in the first half of this year, 11.75% at the end of 2022 and 8% in 2023. The monetary authority must raise interest rates in at least two more meetings.

After the March meeting, the full focus of the Copom becomes the target for next year (3.25%). The collegiate’s inflation projections are around 3.2% for 2023. Despite being numerically within the target, the BC sees 2023 inflation above it in the risk balance.

“We need to do something more than the scenario suggests. So, the BC should deliver more interest or make a longer cycle than the one priced in the reference scenario”, he said.