Campos Neto: fiscal framework eliminates inflation risk – 05/25/2023 – Market

Campos Neto: fiscal framework eliminates inflation risk – 05/25/2023 – Market

The fiscal framework has great power to influence the expectation of future inflation by eliminating the risk of uncontrolled prices in the country, said this Thursday (25) the president of the Central Bank, Roberto Campos Neto.

In an interview with GloboNews, Campos Neto described the vote on the project that changes the country’s tax regime as “resulting”. “I recognize the great work that was done by the government, by the minister [Fernando] haddad [Fazenda]and how Congress mobilized and took a quick vote, a very expressive vote, on a topic like the framework”, he said.

The BC president stated that the framework influences market expectations. “We see long-term interest rates falling a lot, they have already fallen by almost 2% when we think about this process in recent weeks, in recent months,” he said.

“In the expectation part, the framework has great power to influence the expectation of future inflation. Because there was a fear that inflation could simply get out of control. And what the framework makes very clear is that this fear no longer exists” , he added.

According to him, the framework eliminates the “tail risk” [evento raro], and the market is already recognizing this reduction, which is reflected in the drop in long-term interest rates. “I think it actually helps in an environment,” he said. “Any kind of reform helps.”

Pressured by the government to initiate a reduction in the basic Selic interest rate, currently at 13.75% per year, Campos Neto recalled that it is “1 vote out of 9”. “It’s a collegiate vote,” he recalled. He also commented on the criticism he has received from President Lula (PT), who went so far as to insinuate that he had a commitment to the previous government.

“I confess that I thought the opposite, because we made a very high interest rate increase, very fast in an election year. We looked historically and it was the biggest interest rate increase in an election year in the country’s history”, argued Campos Neto . “And we did that exactly to cross the mandates [de Bolsonaro e Lula] with a more stable situation.”

“As we did this in the middle of an election process, I had the understanding that this would demonstrate that the team is very technical and acted in a technical way regardless of the elections”, said Campos Neto, who stressed that Lula has every right to speak on interest.

In the BC president’s assessment, by leading to a credit slowdown, the high interest rate generates anxiety — the government fears that the high Selic could harm the economy’s recovery.

“We understand that this is a natural part of the process,” he said. “The mission is to put inflation on target. Why does the BC have this mission? Because society understands that inflation on target is an element that today generates greater investment stability, job creation in the long term and remembering that inflation is a very wicked tax on the lowest class.”

He also justified that the Central Bank monitors some factors to make its decisions, such as short-term inflation, the country’s ability to grow without generating inflation and expectations.

“We understand that there is still a theme of the goal [de inflação] that needs to be resolved. We think it will be addressed soon. But, in general, we understand that the scenario is better
now”, he said. “When it will happen and if it will happen is a matter for the collegiate and I have no way of advancing, even because I am a vote of nine”, he added.

Campos Neto also defended that the inflation target should not be changed at the moment, as this is a period of great uncertainty.

“It is important to understand that when you make a change in the target thinking that you will gain flexibility to drop interest rates, it usually has the opposite effect. It means that changes in the target or changes in the framework, in general, have to be made aiming to gain efficiency, not a degree of freedom, otherwise you end up losing instead of winning.”

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