BC: disinflation is slow and convergence should occur 2025 – 08/14/2023 – Market

Director of international affairs and corporate risk management at the BC (Central Bank), Fernanda Guardado said this Monday (14) that the ongoing disinflation process in the country has been slow and that convergence to the target should take longer. two years.

“The economy is showing a slow disinflation, which we hope will bring convergence to the 3% target in early 2025”, said the BC director during an online broadcast on the monetary authority’s YouTube channel.

She pointed out that the loss of momentum from inflationary pressure reflects the work started by the BC in 2021, which took the basic interest rate from the historic low of 2% per year to 13.75% at the end of last year.

At the beginning of the month, the Central Bank’s Copom (Monetary Policy Committee) announced the first interest rate cut under the Luiz Inácio Lula da Silva (PT) government, with the reduction of the basic rate (Selic) by 0.5 percentage points —from 13 .75% to 13.25% per annum. The size of the easing generated disagreements and the final score was tight (5 to 4), but the directors were unanimous in predicting new drops of 0.5 points in the next meetings.

The most recent inflation data released on Friday (11) by the IBGE (Brazilian Institute of Geography and Statistics) indicate that the IPCA (National Broad Consumer Price Index) rose 0.12% in July, starting to accumulate of 3.99% in 12 months.

Fernanda, who disagreed with the majority and voted for a rise of 0.25 percentage points at the August Copom meeting, stated that the job market in the country is heated, with a “relatively low” unemployment rate and that the BC works with a growth projection of 2% of GDP (Gross Domestic Product) in Brazil this year.

“The economy has had a very good result in the last three years”, stated the BC director.

She added that the risk of a global environment of persistently high inflation remains on the monetary authority’s radar, in a scenario of tight labor markets in several countries and with the war in Ukraine that keeps supply chains under pressure. “Brazil is not an island and we are exposed to this kind of pressure on prices,” said Fernanda.

Among the opportunities open to the country, the BC director addressed the potential for attracting resources to the region related to sustainability projects. “Brazil has a great vocation for generating clean energy and projects that combat illegal deforestation”.

Public debt and productivity imply higher Brazilian interest rates than emerging peers

The director also said that the BC estimates that the neutral interest rate is currently at 4.5% per year, in real terms, that is, without considering inflation. Taking into account the 3% inflation target, the nominal neutral interest rate comes to 7.5%, she adds.

The neutral interest rate is the one that guarantees that demand is growing in line with supply, so as not to create inflationary pressures in the economy, explained Fernanda.

The BC director also said that emerging peers like Mexico, Chile and Colombia have, historically, neutral interest rates lower than Brazil, between 0.5% and 2% real. According to her, the highest rate in the country is due to factors such as the size of the public debt, the economy’s growth potential and the degree of productivity.