Copom minutes say fiscal framework can help control inflation

The Central Bank’s Monetary Policy Committee (Copom) once again “throwed the ball” to the Executive on the issue of keeping the Selic rate at 13.75% per annum. In the minutes of the last meeting, published this Tuesday (28), the collegiate states that it will continue to monitor the design, processing and implementation of the fiscal framework that will be presented by the government and voted on by Congress.

The postponement of President Luiz Inácio Lula da Silva’s (PT) trip to China, originally scheduled to take place this week, could bring forward the presentation of the new fiscal rule. On Monday (27), the Minister of Institutional Relations, Alexandre Padilha, said that talks should be accelerated this week.

Despite noting that there is no “mechanical relationship” between the convergence to inflation targets and the presentation of the fiscal framework, the Copom highlights that the presentation of a set of solid and credible measures can contribute to a faster disinflation process, by reducing inflation expectations, uncertainty in the economy and the risk premium associated with domestic assets.

Inflation expectations have worsened in recent months, due to uncertainties regarding the fiscal rules that will replace the spending cap. Since December, the median projections for the 2023 IPCA increased from 5.36% to 5.93%; those of 2024, from 3.50% to 4.13%; and those for 2025, from 3.02% to 4%, according to the BC bulletin Focus.

The committee points out that uncertainty about the fiscal framework and its impacts on expectations for the path of public debt – currently at 73.1% of GDP, according to the most recent data – is one of the three risk factors that could lead to the rise inflation and rising expectations.

Other factors that may contribute to rising inflation are greater persistence of global inflationary pressures and greater, or longer-lasting, de-anchoring of inflation expectations for longer terms.

The committee, however, also cites some factors that may contribute to the drop in inflation in the coming months:

• a further drop in commodity prices in local currency;
• a sharper-than-projected slowdown in global economic activity, particularly as a result of adverse conditions in the global financial system; It is
• a slowdown in domestic lending greater than would be compatible with the current monetary policy cycle.

Criticized by Lula, Copom speaks of serenity and patience in interest rate policy

According to the minutes released this Tuesday, serenity and patience are needed in conducting monetary policy to ensure the convergence of inflation to its targets, in an apparent indirect reference to President Lula’s and members of the government’s and PT members’ criticisms of high interest rates.

The agency recalls that the behavior of expectations is a relevant aspect for the inflationary process.

“It affects the definition of current and future prices and wages. As higher inflation is projected ahead, companies and workers begin to incorporate such future inflation into their price and wage readjustments. Thus, there is a greater rise in prices in the current period, and the inflationary process is fueled by these expectations”, point out the BC directors in the minutes.