Campos Neto predicts peak inflation in Brazil between April and May

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Campos Neto predicts peak inflation in Brazil between April and May

The president of the Central Bank, Roberto Campos Neto, said this Friday (11) that the peak of inflation in Brazil should occur in April or May. Previous projections indicated the peak in December 2021 or January this year.

In an event by Esfera Brasil on monetary policy, Campos Neto pointed out as reasons for revising the estimate the increase in oil prices –quoted above US$90– and the crop failure – with drought in the South and excessive rain in parts of the country. Southeast, Northeast and Midwest.

“Then we will see a drop in inflation a little faster,” he said.

The BC president acknowledged that internal factors added to the global inflation shock, but assessed that Brazil took the lead in combating inflationary pressure compared to other countries with rising interest rates. According to him, the BC will use all the tools to bring inflation into the relevant horizon for the target.

In 2021, the IPCA (Broad Consumer Price Index) accumulated a variation of 10.06%. The central target of last year’s target was 3.75%, with a tolerance of 1.5 percentage points up or down, reaching up to a maximum of 5.25%.

“We understood that there would be a more persistent element. It is true that Brazil’s inflationary memory makes the BC’s reaction a little different. But we think it is faster in the tightening cycle, it will depend on how this behaves in the developed world, more specifically in the United States”, stated Campos Neto.

This Wednesday (9), the IPCA for January closed, in the 12-month period, at 10.38%. The inflation pursued by the BC in 2022 is 3.50%, with a tolerance of 1.5 percentage points up and down, and can reach 5%. The increase forecast by the monetary authority is already 5.4%.

To react to high inflation, the BC has raised the basic interest rate, the Selic. In March of last year, it was at 2% per year, the lowest level since the creation of the Copom (Monetary Policy Committee) in 1996.

Last week, on the 2nd, the Copom raised the basic interest rate from 9.25% to 10.75% per year. Since July 2017, the Selic rate has been below double digits, a period in which it was reduced in the face of falling inflation and virtually stagnant economic activity.

The BC also signaled, in the minutes, that the tightening cycle started in March last year has not come to an end, in the face of still resistant inflation that threatens to burst the target for the second year in a row.

Campos Neto’s assessment differs from the diagnoses of the Jair Bolsonaro government (PL). report of leaf showed that there is fear that there will be a spike in inflation in the third quarter of 2022, at the height of the election campaign.

As a result, this risk of rising prices triggered the president’s decision to sponsor the PEC (proposed amendment to the Constitution) that will allow reducing taxes on fuel.

The behind-the-scenes assessment is that further increases in fuel prices could harm the candidacy of Bolsonaro, who is behind Luiz Inácio Lula da Silva (PT) in the election polls.

Government interlocutors heard by the leaf enumerate factors such as the prospect of rising oil prices, food crop failure and even geopolitical disputes as motivations for the Chief Executive to want to forcefully lower the prices of gasoline, diesel, ethanol, gas and electricity.

This scenario of fiscal flexibility worries the BC. This week’s Copom minutes sent messages to the government and Congress.

According to the monetary authority, “even fiscal policies that have downward effects on inflation in the short term can cause deterioration in risk premiums” and lead to “increase in inflation expectations and, consequently, an upward effect on prospective inflation”.

On Friday, Campo Neto also said that fiscal uncertainties impact the long part of the inflation curve and referred indirectly to the PEC for fuels, a project defended by the government to reduce tax rates on fuel and gas.

According to the BC president, the adoption of measures to reduce the prices of products in the short term do not generate a structural effect on inflation, reinforcing the position presented in the Copom minutes.

“Short-term measures that have an effect on prices in the short term have no structural effect on inflation, they do not generate optimization in the monetary policy cycle,” stated Campos Neto.

André Braz, coordinator of FGV Ibre’s price indices, classifies the BC’s task in the current scenario as “arduous” and “ungrateful”. “We lost the fiscal anchor. The responsibility for bringing this inflation to the target is not only of monetary policy. Fiscal policy also has to do its part. A bad fiscal policy implies more inflation”, he told the leaf.

According to the expert, a scenario of high interest rates would normally be attractive to investors. However, this is not what has happened due to the scenario of uncertainty.

“We end up not attracting investors because of the uncertainty, which was brought about or amplified by the way the government has conducted its fiscal policy, without transparency and spending more without presenting a source of funds in return.”

Braz says that this scenario overloads monetary policy because it keeps the Brazilian currency undervalued. “This is a path to inflation that comes both from increased exports and shortages in the domestic market, as well as the obligation to buy more expensive products,” he explains.

At this Friday’s event, the BC president also said that the acceleration of global inflation is much more linked to demand than to supply problems arising from the Covid-19 pandemic.

“Whoever believed that inflation was a supply issue is reviewing the concepts”, he said. The rising inflation in emerging countries, such as Chile and Colombia, in recent weeks surprised, according to him.

Consultant and former director of the Central Bank, Alexandre Schwartsman told leaf which agrees with the estimate made by Campos Neto, but highlights that inflation will not return to the center of the target this year.

“We imagine that inflation will not remain at this current level, but it will not stay within the target either. The Central Bank itself admitted this in the last Copom minutes, in which it said that their reference scenario projection was 5.4% , with a balance of risks pointing to something higher,” he said.

According to Schwartsman, inflation will continue to hover around 10% over the first few months of this year, and then begin to fall. “The economy should slow down even more, this should help bring down inflation.”

“The general design is the same, with inflation at the 12-month rate only falling in a more visible way in the second half of the year, to close around 5.5%”, said the consultant.

The coordinator of the FGV Ibre price indices also recalls that, as of May, a lower tariff will be charged on electricity. In addition, André Braz points out that the BC will have the help of a statistical effect to meet the expectation regarding peak inflation, since the highest inflation rates of 2021 were concentrated in the second half.

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