CMN holds meeting amid clash over interest rates and inflation targets

The National Monetary Council (CMN) will hold its first meeting since the beginning of the third term of Luiz Inácio Lula da Silva (PT) this Thursday (16th), starting at 3 pm. The meeting takes place in the midst of a clash between the president and the Central Bank’s (BC) interest rate policy and inflation targets.

On Tuesday (14), the Minister of Finance, Fernando Haddad, stated that the possibility of revising the target is not on the agenda of the meeting. In addition to Haddad, the CMN is composed of the Minister of Planning, Simone Tebet, and the BC president, Roberto Campos Neto, who defends the maintenance of established targets.

A day earlier, in an interview with the program Roda Viva, on TV Cultura, Campos Neto denied having agreed with the flexibility of the target system in conversation with the government, as some press vehicles announced.

“If you change the goal, it will have the opposite effect. The market will ask for an even greater risk premium,” said the BC president. “Instead of gaining flexibility, you will end up losing flexibility. There is no gain in credibility by increasing the target.”

The speech is corroborated by Mario Mesquita, chief economist at Itaú. “The most guaranteed thing when you raise the target is to raise inflation. What will happen to interest is much more uncertain. As an analyst, if [o CMN] the target goes up, I go up the inflation projection”, said Mesquita in conversation with journalists last week.

Campos Neto admitted, however, that the responsibility for the definition lies with the government, which has two votes out of three in the CMN. “We can technically contribute by making suggestions, but the government is the one who sets the target,” he said.

The subject can still be included in the meeting in an extraordinary way by the Minister of Finance, who chairs the collegiate, but there are indications that the discussion should be postponed after the presentation of the proposal for a new fiscal anchor, which will replace the spending.

This Wednesday (15), at an event promoted by BTG Pactual, Haddad stated that the new fiscal framework will be announced next month, anticipating the previous schedule, which provided for the submission of the proposal to Congress in April. After this Thursday’s meeting, the next CMN meeting is scheduled for March 30th.

Predictability in relation to fiscal policy is pointed out by financial market economists as essential for anchoring inflation expectations for the year. “It is necessary to define [uma nova meta] with technical bases”, says economist Sílvio Campos Neto, partner at Tendências Consultoria, who does not believe in changes at this Thursday’s meeting.

The objectives to be pursued by the BC are defined three years in advance by the CMN – in June, a meeting is scheduled to establish the target for 2026. But, provided there is authorization from the President of the Republic, already established goals can be revised , which has happened in the past.

The target for the year is an inflation of 3.25%, with a tolerance of 1.5 percentage points up or down, that is, in the range of 1.75% to 4.75%.

The Broadcast news service found that Lula wants an increase of one percentage point in the 2023 inflation target, which would take the target to 4.25% and the maximum band to 5.75%, very close to the accumulated rate in 12 months – the 2022 IPCA, for example, stood at 5.79%.

The midpoint of inflation expectations for this year is at the same 5.79%, according to the Focus report released on Monday (13). The median of projections, however, has been rising for nine consecutive weeks.

With the revision, according to technicians from the Ministry of Finance to the news service, the BC could reduce the basic interest rate to a level close to 12% by the end of the year, with a cycle of cuts of 0.25 and 0, 5 percentage point. Interest rates are the BC’s main instrument for pursuing the inflation target, but the increase in the Selic rate, as it makes access to credit and consumption more difficult, slows down economic growth.

Revision of the target without strict and predictable fiscal policy can be “shooting in the foot”

For experts, however, a review of the inflation target without a strict and predictable fiscal policy could result in a vicious circle of rising prices – thus making it difficult for interest rates to drop.

“Seeing the BC as more tolerant of high inflation, we experience the so-called self-fulfilling prophecy: economic agents, on a daily basis, predicting higher inflation, use this data to readjust their prices and wages today, which ends up contaminating prices. and generating more inflationary pressure”, explained Tatiana Nogueira, senior economist at XP Investimentos, to People’s Gazette.

Slívio Campos Neto, from Tendências, assesses the possibility of raising the target with concern. “It would be like shooting yourself in the foot,” he says. “Living with higher levels of inflation would mean accepting greater pressure on the exchange rate and higher market interest rates.”

According to him, the increase in the cost of capital for people and companies would also affect the dynamics of the public debt, which in December closed at 73.5% of GDP, the lowest level since November 2017, according to the Central Bank.

Another impact would come on growth, as consumer decisions by families and investment decisions by companies would be negatively impacted. “It would also contribute to discouraging inflation expectations, affect the pricing of assets and increase the country risk”, says the economist.

Even in the financial market, however, there are dissenting voices. The founding partner and CIO of SPX Capital, Rogério Xavier, for example, defends that the CMN revises the inflation targets as soon as possible to a “credible” level.

“It’s time for the council to meet and reassess the objectives set for BC. Ideally, the CMN should not wait until June to change the inflation target; this change should be made soon”, he wrote in a letter to investors of the SPX Nimitz fund.

He recalls that when the 2023 and 2024 inflation targets were established, there was no prospect of a pandemic and war on the horizon and, consequently, of problems in supply chains and the chip crisis.

“All these supply and demand shocks were very intense and of prolonged duration. The tax regime itself has been completely changed over the last three years,” Xavier said in the text.

“We cannot have a Central Bank making monetary policy targeting a goal that people know will be changed. The longer the government takes to define the new targets, the more difficult it will be to anchor expectations around this new value”, he added.

Regardless of the decision that the CMN will take in relation to the inflation targets, Mario Mesquita, from Itaú, agrees that the ideal thing is for it to be announced soon. “While you don’t decide, with each passing week, the inflation projection increases. The longer without an announcement, the greater the chance that expectations will rise.”

Fernando Jasper and Vandré Kramer collaborated