BC warns that abandonment of fiscal target could raise interest rates

The directors of the Central Bank, through the minutes of the Monetary Policy Committee (Copom), sent a clear message to President Luiz Inácio Lula da Silva (PT): abandoning the goals of the fiscal framework could lead to an increase in interest rates paid to finance public debt. The body reaffirmed in the document “the importance of firmly pursuing” the objectives established for public accounts.

This is a response to the statement made on the 27th, when the president told journalists that it would be difficult for him to meet the zero deficit target for 2024, set out in the fiscal framework sanctioned just over two months ago. The statement was reiterated last Friday (3), when, in a meeting with ministers, he said that good money is in works and not in the Treasury.

The committee had assessed in previous meetings that fiscal uncertainty was affecting the implementation of the goals that had been presented. But, in the minutes released this Tuesday (7), it points out that uncertainty has now grown around the target itself, which has led to an increase in the risk premium – that is, the cost of financing public debt.

This is because, after Lula’s statements, the political wing of the government started to defend a review of the fiscal target – which foresees zero primary deficit next year. In turn, the Minister of Finance, Fernando Haddad, is fighting for the target to be maintained for now and only re-evaluated in 2024.

“The slowdown in the effort towards structural reforms and fiscal discipline, the increase in targeted credit and the uncertainties about the stabilization of public debt have the potential to increase the economy’s neutral interest rate, with deleterious impacts on the power of monetary policy and, consequently, on the cost of disinflation in terms of activity”, says the minutes.

Another factor of concern is inflation expectations, which, according to the document, “remain unanchored”. In the minutes, the Copom highlights that reducing expectations requires firm action from the Central Bank and, also, the continuous strengthening of the credibility and reputation of both the institutions and the fiscal and monetary frameworks that make up Brazilian economic policy.

According to the committee, the reduction in efforts to implement structural reforms and fiscal discipline, the increase in targeted credit and uncertainties related to the stabilization of public debt could contribute to an increase in the neutral interest rate. This rate is one that neither stimulates nor discourages economic growth, and an increase in it can have detrimental impacts on the implementation of economic policy and, consequently, on the cost of reducing inflation.

Rodolfo Margato, economist at XP Investimentos, stated that the Copom minutes were tougher, reiterating the need to pursue fiscal objectives. He also assessed that the scenario is more uncertain, motivated by geopolitical issues.

Pace of disinflation is weaker

The committee also recognizes that some sources of disinflation have been exhausted, such as reduced downward pressure on the prices of industrial goods. The prices of agricultural commodities and food, which contributed to the reduction in inflation throughout 2023, no longer indicate drops as pronounced as in previous quarters.

Additionally, the committee warns that components related to industrial goods and government-administered prices may present a less favorable behavior than previously expected, due to recent movements in exchange rates and international commodity prices.

One of the risks to inflation is the climate phenomenon El Niño, resulting from the warming of the waters of the Central Pacific, which can cause an increase in rainfall in the South and Southeast and a reduction in the North and Northeast. The committee assesses that the impact of this phenomenon will be relatively small, but some members consider that there will be inflationary impacts if the phenomenon becomes more extreme.

Brazilian inflation does not follow the G20 trend

The Organization for Economic Cooperation and Development (OECD), in a report released this Tuesday (7), noted that annual inflation in the countries that make up the G20, the 20 largest global economies, fell from 6.3% in August to 6.1% in September. However, there was an increase in inflation in three countries: South Africam Argentina, Brazil.

The IPCA accumulated over 12 months reached 5.19% in September, marking the third consecutive month of increase in the rate, according to data from the Brazilian Institute of Geography and Statistics (IBGE). One of the reasons for this increase is the end of the effects of deflation recorded in the third quarter of 2022, which was motivated by the cut in fuel taxes.