Inflation worsened both quantitatively and qualitatively, says BC president

The president of the Central Bank, Roberto Campos Neto, indicated this Tuesday (16) that the monetary authority needs to be realistic about the worsening of inflation, which happened both in quantitative and qualitative terms.

By participating in the IX Legal Forum in Lisbon, in Portugal, he also stated that Brazil is going through a situation that is occurring for the first time in decades, in which it faces a problem of internal inflation, while importing inflation from other countries .

“The number of inflation accelerated and worsened both quantitatively and qualitatively, we have been emphasizing that,” he said.

“It is very important to be realistic and understand how widespread inflation is and how difficult the work of the Central Bank will be at this point,” he added.

In his speech, Campos Neto acknowledged that the BC has more recently noticed an upward revision of inflation and downward growth in 2022.

He once again attributed the advance in prices in the economy to the strong shock in food that occurred last year and to the new shock that occurred this year, linked to electricity and fuels, which he classified as “the biggest in the last 20 years”.

The BC’s Copom (Monetary Policy Committee) meets on December 7 and 8 for the next decision on basic interest rates, currently at 7.75% per year. At the last meeting of the collegiate, at the end of October, the message was that another increase of 1.5 points was foreseen by the monetary authority, as long as the scenario did not change.

According to the most recent Focus survey, economic agents are already expecting a GDP (Gross Domestic Product) below 1% next year, with inflation of 4.79%, against a central target of 3.5%, that BC had been stressing to be possible to achieve.

Campos Neto also indicated this Tuesday that the increase in the risk premium linked to the country is connected with the fiscal and with questions about the trajectory of public accounts ahead — something that is more related to the vision of how much Brazil can grow structurally than with day-to-day fiscal data, which have improved.

Campos Neto said that the monetary authority in general does not talk about the subject, but he stressed that developments on the fiscal front have an impact on the neutral interest rate and, therefore, on the work of the BC.

“If I have the same fiscal balance model with growth of 2.5% to 3% and an interest rate of 7%, and I change the growth from 2.5% to 3% to 1%, and I move to a rate interest rate of 8%, I clearly no longer have a sustainable thing to have something explosive,” he said.

Campos Neto said that, on the one hand, Brazil needs to make a fiscal effort, and it is “very important” to offer a cut in spending. He said, however, that he understood the difficulties in this regard within the scope of the “political world”, which “generates its limitations”.

On the other hand, he pointed out that what will really balance perceptions about Brazil in the future is the country’s capacity to grow more, noting that in the last seven years the GDP was “very low”.

“It is important to leave a message that we have to follow through with structural reforms, [é] how to find this fiscal balance with credibility. Credibility today, more than in the details of the day-to-day fiscal, is to send a message that we are a country that has the capacity to have higher sustainable growth,” he said.

Regarding the external scenario, he stressed that the world will go through a process of normalizing interest rates after the stimulus given during the pandemic, which will make the environment “even more challenging” for Brazil.

2022 is a year of slowdown, not recession, says BC director

The director of International Affairs and Corporate Risk Management​ at the Central Bank, Fernanda Guardado, said on Tuesday that 2022 is a year of economic slowdown, not recession.

Participating in a webinar promoted by Aberj, she stated that the monetary authority is aware of the revisions to the GDP in the red made by “many people”, but stressed that the BC has “very difficult” to see these negative numbers for next year .

Guardado pointed out that the BC does not work with a stagflation scenario, as it sees positive growth for Brazil in 2022, with help, for example, from the agricultural and service sectors, the latter seeking its “new balance” after the impact suffered. by the Covid-19 pandemic.

According to the most recent Focus bulletin, the median of economic agents’ expectations is an advance of 0.93% for the activity next year and 4.88% this year. Some large banks, such as Itaú Unibanco and Credit Suisse, already forecast a retraction in activity in 2022.

“For 2021, we see the market getting closer to the number of the Central Bank, and important drops in the projections for 2022”, said Guardado, after reinforcing that BC’s projection is for a GDP increase of 4.6% to 4, 7% in 2021.

In its last Quarterly Inflation Report, at the end of September, the BC forecast GDP growth of 4.7% this year and 2.1% in 2022.

Still on market expectations, Guardado acknowledged that the accounts for inflation have been adjusted “consistently upward” this year, with part of this inflation having some impact for 2022, while there is already a “shy increase” in the numbers for 2023 against the target.

In Focus, estimates are for IPCA at 9.77% in 2021, 4.79% in 2022 and 3.32% in 2023, in all cases above the central targets of 3.75%, 3.5% and 3 .25%, always with a tolerance margin of 1.5 points more or less.

The BC calculated the IPCA of 9.5% for 2021, 4.1% for 2022 and 3.1% for 2023 in its last Copom meeting, at the end of October.

Regarding the discussion on fiscal dominance, the director considered that it is very difficult to say that the BC is being passive and accommodating fiscal policy.

According to her, this would be to believe that BC will not put the interest rate at the necessary level due to the concern with debt sustainability, and this situation is not consistent with the actions that are being effectively taken by the authority.

Since March, when the monetary tightening cycle began, the BC has already raised the Selic rate by 5.75 points, to the current level of 7.75% per year, having indicated that it will promote another adjustment in basic interest rates in December.