BC director: ‘inflation projection is the main compass’ – 07/10/2023 – Market

Director of International Affairs and Corporate Risk Management at the Central Bank, Fernanda Guardado says that criticizing interest rates is part of the job, but she sees the interpretation that the Copom (Monetary Policy Committee) has a political role as unfair.

In an interview with Sheetthe director claims to have been part of the most cautious group at the last meeting of the collegiate regarding signaling the BC’s future steps, but points out that there were nuances even among the members who defended indicating the possibility of cutting interest rates in August if inflation continues to fall .

According to Guardado, the Copom’s performance is more dependent on the data since June, and the decisions on the easing (or not) of the monetary policy and the magnitude of the next movements will be taken at each meeting. “Our inflation projections are the main compass”, he says.

In her view, the definition of the CMN (National Monetary Council) on inflation targets, with a continuous target of 3% from 2025, is “an evolution for Brazil” and the country’s fiscal risk has decreased over the last semester .

At the international level, the director says that the SML (Local Currency Payment System) has potential for growth in transactions involving Mercosur countries, but considers that its expansion runs into limitations. The project to create a common currency, according to her, is not very close to reality today.

In the Copom minutes, there was divergence, with the majority wanting to signal a possible interest rate cut in August and the more cautious minority. In which group did Mrs. it fits?
I was in the more cautious group. We are at a point that still inspires some caution. The disagreement was about an emphatic signal regarding the next steps. The statement is the consensus of the group. In the minutes, we make it clear what the debates and disagreements are. There were nuances within the majority itself who thought that there should be a signal that there could be an easing in August.

The Copom conditioned its future steps to the data. What is the most important factor at this moment for the interest rate decision?
Starting in June, the committee went into more data-dependent mode. In jargon, we call it data-dependent. We are going to take into account all the data, current inflation, assess how things are going in relation to what we expect, if our own projections will change in any relevant way. Our inflation projections are our main operating compass. And also see the behavior of expectations. This set of factors will form the basis of the August discussion. When we wrote the statement, there was a decision by the board to make communication more flexible. This was done and I think it was well understood by the market.

There was noise when reading the communiqué and the Copom minutes. Is there a communication failure?
No. Economists and the market, who used to follow the BC’s language for a long time, understood that there was a flexibility in communication. Beginnings and endings of the cycle, or moments when there begins to be a little more divergence between the members of any collegiate, are more complicated. It is difficult to put all the nuances of vision in a short document, this can only be made clear even in the minutes.

At the next Copom, we will have the arrival of the first nominees by the Lula government to the BC, such as former secretary Gabriel Galípolo, and an increase in expectations for the reduction of interest rates. As Mrs. see this correlation?
The expectation for interest rate cuts is natural. We will receive very well, with open arms, both Ailton [Santos]which is house silver, as the [Gabriel] Gallipolo. Let’s see how the discussion in the committee goes. There will be different opinions, we will analyze all the data in great depth. This expectation that permeates the market has more to do with the cycle than with people.

Although the BC emphasizes that it makes technical decisions, aren’t they also political to some extent? How do you see the matter?
I think this interpretation that the Copom has a role with any political connotation is quite unfair. The Central Bank of Brazil is widely recognized by its peers, by international investors and by the rating agencies themselves. The BC acts in a technical way, we had a very forceful performance last year with the intention of bringing inflation towards the targets, despite it being an election year. We continue to act for the best long-term result for the economy. Congress granted the BC autonomy so that it could act independently of political pressures and in order to make decisions that are not just related to interest rates, they are related to regulation, supervision, competition in the market. The BC is much more than just the interest rate decision.

Is tax less of a concern today?
Yes. The fiscal framework presented by the minister [Fernando] Haddad had the role of eliminating tail risks [remanescentes] of the fiscal scenario. The minister has shown a great deal of commitment in trying to deliver the goals he set for himself. The revenue package is still being negotiated, let’s wait. But I think the fiscal risk has diminished over the semester.

What has it been like to work with the pressure of criticism of the BC’s performance?
We are a state body and we are accountable. It is up to us, directors, who won our mandate in the Federal Senate, to explain what we are doing and how we are playing our role. Criticism of the interest rate policy and different opinions are part of the job.

Does the confirmation of the 3% inflation target give the Central Bank more comfort to start reducing interest rates in August?
This decision improves the targets regime and aligns us with our international peers. It is an evolution for Brazil. This was also the solution advocated by BC. It was a decision that was well received by economists and society and that seems to be having an impact on long-term inflation expectations.

Despite the BC mentioning a possible “parsimonious” interest rate hike, the market reduced the Selic forecast to 12% in 2023. Is a larger cut possible?
pace decisions [intensidade] and the easing or not of monetary policy, we will take it at each meeting. At the August meeting, we will see how the whole set of information has evolved in relation to what we expected and what we want to see. Words like “parsimony” were inserted into the communiqué and minutes unanimously and consensually by the committee and they have a role there.

Does the continuous inflation target ratify a model that is already implemented by the Central Bank?
There has been confusion between what target measurement is and the period of target convergence. The assessment of whether or not the BC has fulfilled its mandate will now have to do with the analysis of inflation accumulated in 12 months in each month, instead of looking only at the month of December of each calendar year. In the last two years, we wrote open letters in January referring to the non-compliance with the inflation target. It changes a little bit, but in terms of looking at our convergence horizon, it shouldn’t change much.

What is the main gain of this system?
It makes it easier for people to understand and follow what the BC is doing and prevents incentives to make decisions at the end of the year just to ensure that the goal is achieved.

In your view, is it better for the BC to set the convergence period?
We have been experiencing a very complex macroeconomic scenario, especially after the pandemic. The country is going through different changes, and different shocks have different impacts. It is important that the BC has flexibility to determine its convergence horizon. Sometimes convergence can be done more quickly without incurring costs [para economia]sometimes more slowly.

The frequency of reporting may change. What might be interesting?
Some Central Banks, such as England, draw cards every time inflation exceeds the ceiling of the target in 12 months. If you imagine a period of inertial inflation, you would have to write letters every month. Having an annual periodicity to provide society with accounts of what happened over the last 12 months seems like a good idea, but this is a definition that is up to the government.

How is Brazil preparing to assume the presidency of the G20?
We have had an excellent relationship with the Ministry of Finance, which coordinates the track [trilho] together with the Central Bank and the Ministry of Foreign Affairs. We are united in making a G20 that can bring effective deliveries to society and that can reflect Brazil’s priorities in terms of digital assets and sustainability. There is a lot of expectation regarding the Brazilian presidency.

Can you advance something?
Discussions regarding what will be Brazil’s priority are still ongoing. We are going to have a first meeting of deputies, of vice-ministers and directors of G20 Central Banks, here in Brasília, in December. Let’s set the work schedule from there.

The Lula government wants to transform the SML [Sistema de Pagamentos em Moeda Local] in a multilateral system. Are there obstacles?
SML is a good local currency payment system, but has shown limited growth as yet. He didn’t reach his full potential. It is a possible way to increase intraregional trade in own currencies. But that brings me to the limitations we’re facing here. The BC needs to have symmetry with careers typical of the State. BC has demonstrated a huge productivity gain, delivering important projects, such as Pix. We have greatly increased our scope of activities, despite our workforce being significantly reduced. SML is one of the areas that suffer from a lack of human resources for us to continue this expansion.

Would the expansion limitations be more related to the lack of personnel?
The system has a dialogue with several banks, we need to have people allocated for any compensation problem. We have a lot of operations today with Argentina. If it’s going to expand to other countries, we need to have more people following how the system is working. With the return of standard operations at the BC and with the limitation of personnel, our operational risks have grown in several segments of activity.

How can the discussion on the creation of a common currency be made possible?
Common currency is a broad project, which requires macroeconomic convergence between countries, it is something more difficult, today not very close to reality.

Would you like to add something?
If we wanted inflation to be already within the target in 2023, we would have had to raise interest rates much more. We did this long convergence exactly to moderate the economy’s losses and, at the same time, ensure that inflation came to the target. The BC’s autonomy and technical performance gains are clear at this time when inflation is decelerating, while positive results are being reaped, also partly due to the work of the Ministry of Finance, in the economy.

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Fernanda Guardado, 43
She is director of International Affairs and Corporate Risk Management at the Central Bank, with a term of office until December 31, 2023. She worked for more than ten years in the financial market, holding positions as chief economist at Banco Bocom BBM (2019 to 2021) and at Vinci Partners (2010 to 2012). She holds a Bachelor’s, Master’s and Doctorate in Economics from PUC-Rio (Pontifical Catholic University of Rio de Janeiro).