Government criticizes BC for gradual pace of interest rate hikes

The gradual pace adopted by the Central Bank to raise the basic interest rate, the Selic, has been criticized by the Ministry of Economy in view of the escalation of inflation, which has accumulated a high of 11.30% in 12 months – the highest level since October. of 2003 (13.98%).

Inflation has been seen within the government’s own political wing as a negative factor for President Jair Bolsonaro’s (PL) re-election campaign this year.

While the government is a constant target of warnings from the monetary authority for the risks on the fiscal side, a member of the economic team heard by the sheet points out that the BC spent much of 2021 with negative real interest rates (nominal rate below the variation of inflation), which ends up stimulating the heating of the economy and paves the way for price acceleration.

In the assessment of this source, there was a “small nap” by the Central Bank, which would have been more effective if it had opted for a harsher shock in interest rates to contain the rise in inflation.

Meanwhile, the monetary authority has sought to shine the spotlight on the fiscal, which has bothered the economic team.

The Selic remained at a historic low of 2% per year between August 2020 and March 2021, after the Copom (Monetary Policy Committee) cut the interest rate to revive the economy in response to the crisis caused by the Covid-19 pandemic. .

Last year, the BC started the monetary tightening cycle, but at a gradual pace, with increases of 0.75 percentage point. This pace increased as inflation began to show signs of resisting the monetary authority’s attempt to control it.

Even so, the IPCA (Broad Consumer Price Index) accumulated a variation of 10.06% in 2021, breaking the target of 3.75%, with a tolerance of 1.5 percentage points up or down.

This year, the market already foresees a new burst of the target, which will lead the president of the Central Bank, Roberto Campos Neto, to write a letter with his justifications for the noncompliance.

In the opinion of the source of the economic team, the BC is too concerned with communicating its strategy to the market so as not to cause sudden surprises, but the strategy may end up compromising its agility in fulfilling its mission of guaranteeing the stability of the currency’s purchasing power.

This important government interlocutor believes that price control demanded an aggressive increase in interest rates, from a minimum of 2% to something already close to double digits. According to the source, the most drastic dose would signal the BC’s commitment to fighting inflation, even if it caused some turmoil in the short term.

The current action of the monetary authority, however, is evaluated as a strategy of “warning in advance so as not to hurt anyone”.

The source recognizes that the lower interest rate hike contributed to easing the trajectory of Brazilian public debt, which closed 2021 at 80.3% of GDP (Gross Domestic Product), after a considerable increase to fund programs to combat the pandemic. However, the assessment is that this turned out to be bad for inflation.