Campos Neto: continuous inflation target is more efficient – 06/29/2023 – Market

The president of the Central Bank, Roberto Campos Neto, said this Thursday (29) that having a continuous target for inflation is more efficient than the current model, which follows a closed calendar year, and that this improvement of the system is ” interesting”.

The head of the monetary authority cited the conclusions of a study carried out by BC technicians on the subject in 2017. He pondered, however, that evidence shows that there is no gain in flexibility in interest rate policy when there is an increase in the percentage of the target to be pursued due to the negative impact on inflation expectations.

The issue of inflation targets will be considered this Tuesday afternoon by the CMN (National Monetary Council). As for the BC’s position on possible changes, Campos Neto said he had not yet read the text of the vote.

On the eve of the CMN meeting, Minister Fernando Haddad (Finance) spoke about the possibility of adopting a continuous objective, a model in which the Central Bank needs to pursue a certain target without being linked to a closed calendar year, as is the case today.

This Thursday morning, President Luiz Inácio Lula da Silva (PT) also defended that the inflation target should not be “fixed and eternal”, but a flexible target suited to economic reality.

The Chief Executive still recalled his first term, when he said there was pressure to set an inflation target of 3%, but that it was “very difficult” to meet it. Then he added that the solution found was 4.5% with a variable band of two percentage points up and down.

“That [modelo de meta móvel] it’s a gain, it’s an improvement, but we need to understand how the measurement will be made and how the justification will be made in relation to that”, said Campos Neto in the presentation of the quarterly report.

“If you make a system where it is more volatile, you end up being forced to write a lot of letters or give continuous explanations, it may end up having the opposite effect to what you wanted, you may have greater flexibility”, he continued.

Diogo Guillen, director of economic policy, added that changes in the inflation regime “cannot affect the conduct of monetary policy” and defended that the credibility of the system is a crucial point.

Under the current model, the CMN —made up of the Ministers of Finance, Planning and the President of the Central Bank— needs to decide, by June 30 of each year, the inflation target that will be in effect three years ahead. Therefore, the collegiate must define this Thursday the central target of monetary policy for 2026.

“There are two decisions. The first is what the target is, it is a vote, today it is valid for 2026, if it is decided that the target is the same, you can say that it is valid from today because the target is 3% and continues as 3 %. The other decision is whether it will be a fiscal year or whether it will be continuous. All this needs a decree, it is being discussed. I have not seen the text, I do not know the details”, stated Campos Neto.

For 2024 and 2025, the target has already been set at 3.25% and 3%, respectively, with a tolerance margin of more or less 1.5 percentage points.

According to reports, members of the Lula government are seeking a consensus position to change the inflation targeting system.

The lack of definition around the subject is seen by economists as part of the justification for the BC’s conservatism in its interest rate policy. The understanding is that, once the matter is overcome, the behavior of inflation expectations should help the monetary authority to guide the beginning of Selic cuts.