Tax cut does not hold inflation in the long term, says Campos Neto after Guedes announces IPI reduction

The president of the Central Bank, Roberto Campos Neto, said this Tuesday (22) that reducing taxes can help to reduce inflation in the short term, but has no effect in a structural way. At a bank event, he was asked about the announcement made on the same day by Minister Paulo Guedes (Economy) to forgo IPI (Industrialized Product Tax).

Campos Neto’s statement came hours after Guedes said that the government is preparing a 25% cut in the IPI in “a move to re-industrialize Brazil.” Both statements took place at an event promoted by BTG Pactual.

“If you lower taxes or do something that gives up revenue to obtain a lower product price at that moment, structurally you are not helping inflation”, stated Campos Neto when answering a question on the subject.

“You may have a drop in the short term, but, in terms of inflation expectations, this will be incorporated and this element tends to prevail structurally in the medium and long term”, said the BC president.

As shown by sheetthe government has used the IPI cut as a form of pressure on governors to accept a change in the collection of ICMS (Tax on the Circulation of Goods and Services) on fuels.

According to Campos Neto, countries like Colombia and India are also discussing tax cuts. However, he pointed out that the high inflation is due in part to relief programs during the pandemic, which have expanded spending around the world.

“Given the persistence of this inflationary effect, in part generated by the great fiscal plan, it is with some curiosity that we see that some countries suggest that the solution is to do more fiscal”, he said.

As for the Brazilian scenario, the BC president said he expects inflation to remain high, but begin to accelerate its decline in the period between April and May, looking at the 12-month period. This Tuesday (22), he claimed to have been misunderstood about the peak of inflation.

“I made some statements saying that we thought that inflation would start to fall faster between April and May, there was an understanding that the peak would be between April and May. I said that inflation will remain high and will start to accelerate the fall between April and May”, he reinforced.

The official inflation index in Brazil started 2022 with a high of 0.54% in January, with an accumulated high of 10.38%, according to the IBGE (Brazilian Institute of Geography and Statistics). In the 12-month period up to January, the rate is the highest since 2016 (10.71%).

Campos Neto also said, at the event, that the BC is closely watching the inflation of services, since the consumption of services has not yet returned to the pre-pandemic trend and the last number “surprised negatively”. According to him, the monetary authority considers in its calculations that industrial inflation should fall and services inflation should rise.

To react to the rise in inflation, the BC has raised the basic interest rate. At the last meeting, in February, the Copom raised the Selic rate from 9.25% to 10.75% per year. This Tuesday (22), the president of the autarchy again evaluated that Brazil took the lead in the fight against inflationary pressure compared to other countries with the increase in interest rates.

The BC has also already signaled 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. 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, however, is already 5.4%.