BC will act when it is comfortable that inflation is on a trajectory compatible with targets, says director – 04/17/2023 – Market

The director of Regulation at the Central Bank, Otávio Damaso, sees the mission of the Copom (Monetary Policy Committee) as ensuring low and stable inflation and considers that the moment still requires serenity in the conduct of interest rate policy.

In the midst of pressure from the government of Luiz Inácio Lula da Silva (PT) to reduce the basic rate (Selic) –today set at 13.75% per year–, the director states that the BC “will act as soon as it is comfortable that the inflation is on a trajectory compatible with the targets regime”, seen by him as “very successful”.

In an interview with SheetDamaso rules out risk in the credit market, despite recent episodes involving the collapse of banks in the United States, the Credit Suisse crisis, in addition to the Americanas case in the domestic scenario.

He also comments on the Regulation area’s agenda for this year, highlighting three groups: innovation, new foreign exchange law and prudential regulation – which establishes requirements for financial institutions focused on risk management and minimum capital requirements.

Which issues on the BC’s regulatory agenda for 2023 have the most impact on the lives of Brazilians? I would like to single out three groups. First, innovation. The Central Bank has stood out with this agenda, adapting regulation to favor innovation in the financial market, but also being an innovative agent with projects such as Open Finance, Pix and digital real.

At Open Finance, we have 28 million consents for data sharing. He’s already bringing competition to products that had no competition. What has always been the Achilles heel? The overdraft. We see a transformation of the financial system.

The second group is the exchange legislation reform. The first law, in force until 2021, was from 1920. It was always a very blocked legislation, aiming to retain foreign currency, it is not the context today. We made a revolution in the framework, with a single law with 29 articles, much more principled. BC comes now with the regulation process.

What is missing to complete the new foreign exchange legislation? And the discussion about non-resident accounts? The bureaucracy in the non-resident account was high and inhibited the attraction of investors, mainly smaller ones, given the immense cost. We equated the rules for non-resident and resident accounts. This already has concrete effects. For example, a commercial establishment in France accepts Pix. It brings benefits to those traveling abroad and facilities for importers and exporters. There are other issues that we will regulate in the next two years, such as the interbank market and private compensation.

And the third group? It is prudential regulation. The Basel III agenda [resposta regulatória à crise de 2008] has to be implemented. We have been creating all the conditions for adaptation. The financial system is extremely solid, very well provisioned, fully capable of absorbing this regulation with ease.

Banks raised questions regarding the new rules on operational risk, one of which focused on labor legislation. What it is? Within the operational risk, comes the legal risk. In the Brazilian case, one aspect of the legislation impacts the process of banks related to labor claims, especially when the employee resigns. If the standard were to be strictly adhered to, the capital requirement would be very high. But it is a known risk in the Brazilian case of Justice, so we are trying to deal with it in a way that is compatible with the risk it represents and is not a punitive capital requirement. The Basel Accord understood this peculiarity.

Thinking about financial stability, how do you analyze the behavior of the credit market? Credit is within normal, predictable behavior vis-à-vis monetary policy and the national and international economic environment. The balance forecast fell from 8.3% to 7.6%, but it is for growth. The financial system has a very good provisioning level, liquidity indicators are 100% satisfactory and capital [está] well above regulatory minimums. We don’t see any kind of financial stability problem. The credit market is experiencing a decelerating conjunctural behavior, with defaults rising within normal limits. Household defaults are slightly higher, but still below historical peaks.

Mr. Don’t you see the risk of a credit crisis in the country? We do not identify any type of risk in the credit market, everything is within normal limits. Specific events drew attention, and we monitored them. It has some kind of impact, but it’s still not visible in a significant way.

There is concern about the interest rate on revolving credit, which exceeds 400% per year. Because the BC does not discuss the possibility of imposing a limit? The credit card industry mixes with means of payment and instrument of credit. It moves around R$ 1 trillion more per year. It is not on the agenda of the Central Bank any kind of interest rate regulation. We seek mechanisms to make financial instruments more efficient. BC is not thinking of any kind of cap [limite]because this could bring instability to a market that feeds all sectors of the economy, especially retail, which is extremely dependent on this instrument.

Minister Fernando Haddad (Finance) said he is discussing joint agendas with the Central Bank. Which? Our interaction with the Ministry of Finance is excellent. We have several projects under discussion. One is already in Congress, which is the Bill of Guarantees. We have a lot of interaction on matters that will come to the CMN [Conselho Monetário Nacional]whether in the part of credit, payment, instrument of agricultural policy.

How has the work with the government been as a whole? Our relationship is very constructive, of exchanging information, of collaboration. I deal with government agencies, be it Previc [Superintendência Nacional de Previdência Complementar]SUSEP [Superintendência de Seguros Privados]CVM [Comissão de Valores Mobiliários]. At the Ministry of Finance, I deal mainly with the Secretariat for Economic Reforms and specific things with the Treasury. The relationship continues to flow very well.

The BC has been pressured by the government on interest rates. The last inflation index came in lower than expected by the market. Is it really necessary to wait until the second half of the year to start cutting the Selic rate? The Copom feeds on extremely rich and intense work from the technical areas, with a set of quantitative and qualitative information from different areas. This all comes to our cycle of Copom meetings, in which we are bombarded with this set of information and make decisions.

What is our objective? Looking at a broader perspective, it is to ensure stable and low inflation. The targets regime has been very successful. We are at a time when we need a lot of perseverance, tranquility and serenity to conduct monetary policy. We went through a time when there was a labor market [aquecido] and more resilient services inflation. We will act as soon as we are comfortable that inflation is on a path compatible with the targets regime. The targeting regime has shown its value in terms of predictability.

A rediscussion of goals is it legitimate? The target regime has guaranteed stable inflation at a low level compatible with what is defined. It has given predictability to economic agents. It has also been shown to be flexible to absorb shocks. [inflacionários] without excessively penalizing the economy, always aiming at the convergence of inflation towards the target defined by the CMN.

When talking about stability, the fiscal issue is always discussed. the presentation of tax framework takes uncertainty out of the scenario? This movement that the Ministry of Finance is conducting to define the fiscal framework is very important. You have touched on a point that is uncertainty. Uncertainty is very cruel to the decisions of economic agents. Having a credible fiscal framework is a super important component to providing predictability. We know that the fiscal issue is relevant to monetary policy. This communication is mainly based on expectations, which will affect inflation, but it is not an automatic transfer mechanism.

The government spoke about the creation of a common currency and advocated the use of local currencies in international trade. In terms of regulation, what would it take? Among the objectives of the foreign exchange law was to eliminate legal and regulatory obstacles to the internationalization of the real. This was done and opens up spaces for international payment mechanisms and the use of the real for other transactions. I believe that at some point there will be a more intensive use of the real, mainly on our border, with commercial partners in South America. In terms of legislation, today there is no more obstacle.

About the regulatory framework for cryptocurrenciesshould the BC act as a regulator? It is a decision that rests with the President of the Republic. We are waiting for the publication of a decree defining which entity will regulate.

The BC planned to launch a public consultation for new ESG rules for the financial sector in the first quarter. Do you already have a forecast? In Regulation, it is a prudential agenda. I want to know what risks can come from segments A, B and C related to sustainability for the financial system. In 2020, we relaunched the agenda. Mandatory publication in the [relatório] TCFD of climate, environmental and social risks and standardized information. We took a break because the international forums began to discuss the standardization of accounting rules from the perspective of climate issues. In order not to have to redo the rule, we are waiting for the group to finish the work.

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Otávio Ribeiro Damaso, 51

He is director of Regulation at the Central Bank, with a mandate until December 31, 2024. He was general coordinator of Institutional Reforms at the Ministry of Finance between 2008 and 2009 and deputy secretary of Economic Policy in the portfolio from 2003 to 2008. He holds a degree in economics and specialization in mathematics for economics and administration by UnB (University of Brasília).