Debate on target puts pressure on inflation

The debate and lack of definition about the inflation target are causing an “unanchoring” of expectations, which puts pressure on future inflation and complicates the work of the Central Bank (BC) in conducting interest rate policy. The assessment is made by the CEO of Banco Itaú, Milton Maluhy Filho.

“To the extent that there is an expectation that the target can be revised, the market anticipates this future inflation. And this clearly brings more difficulties even for the Central Bank to be able to make its monetary policy decisions”, said Maluhy this Wednesday ( 8), in conversation with journalists at the bank’s headquarters.

For the executive, maintaining the target at current levels would send the market a message of low tolerance for inflation, which would reduce future interest curves and, therefore, the cost of credit.

Although he considers the debate “natural” and “of the game”, the executive defended that the decision on the goals take place soon, “whatever it may be”, to reduce the noise.

This debate was inaugurated by President Luiz Inácio Lula da Silva (PT), who has been scathingly criticizing not only inflation targets, but also the interest rate policy and the BC’s formal autonomy, in force since 2021.

For Lula, the targets – 3.25% this year and 3% in 2024 and 2025 – are low and make the Central Bank force its hand on the basic interest rate (Selic), hindering economic growth. The petista indicates that he is in favor of a target close to 4.5%, like the one in force between 2005 and 2018.

Lula’s pressure, however, may have the opposite effect to what he wants. Many analysts understand that signs of tolerance with higher inflation tend to generate more inflation, which would lead the Central Bank to maintain monetary tightening for a longer time or, as a last resort, raise interest rates.

The Selic has been at 13.75% a year since August, the highest level in six years. The rate reached the historic floor of 2% in 2020, but started to rise from March 2021 as a BC reaction to the advance of inflation.

For now, Itaú’s expectation is that the Selic will end the year at 12.5%. That is, the bank still sees room for rate reductions in the second half.

The National Monetary Council (CMN) should meet in the coming months to define the target for 2026 onwards, but nothing prevents it from reviewing the current objectives. The collegiate is formed by the president of the Central Bank, Roberto Campos Neto, and by the ministers of Finance, Fernando Haddad, and Planning, Simone Tebet. By having two votes, the government can change the target even if the BC opposes it.

Itaú CEO sees “positive signals” from Haddad, but awaits “concrete facts”

In the interview, the CEO of Itaú praised the willingness of the Minister of Finance, Fernando Haddad, to maintain contact with various sectors, including finance. He said that he has been receiving “positive signals” from Haddad and his team, “in the right direction”, but that the market is waiting for “concrete facts, to remove any noise from the yield curve”.

According to the executive, there are expectations not only regarding the inflation target, but also about the return of federal taxes on fuel. A provisional measure edited by President Lula extended the exemption until the end of this month. The resumption of charging, if confirmed, will have a positive impact on the government’s coffers, but should generate some pressure on inflation.

Maluhy said that the package presented by Haddad in January, to reduce the primary deficit of the Union, was an “important initiative”: “It is a plan that naturally depends on approvals in Congress, but the signaling is positive, of an effort in relation to that”.

Another very important announcement expected for the next few months, according to him, is the new fiscal framework, which will replace the spending cap. “The market as a whole, the country, local and foreign investors are looking at the new framework,” said Itaú’s CEO. Minister Haddad has promised to present the new fiscal policy by April.

Maluhy describes another of Haddad’s priorities, tax reform, as “fundamental” for the country to raise its productivity.

Although the executive seeks to show some optimism, Itaú’s projections are for a difficult year for the Brazilian economy, with Gross Domestic Product (GDP) growing only 0.9%, inflation of 5.8% and dollar reaching R$ 5, 50 by the end of the year. And credit should grow more slowly: after an advance of 11.1% last year, Itaú expects its financing portfolio to advance between 6% and 9% in 2023.

International scenario has improved and creates opportunity for Brazil, says Itaú CEO

Itaú’s CEO understands that the international economic scenario has improved, due to a series of factors: the energy crisis in Europe is not as severe as imagined, which will ease the recession in the continent; the Fed, the central bank of the United States, has managed to contain inflation, which indicates a slower rate of increase in interest rates from now on; and China is growing again with more strength thanks to the reopening after the lockdowns.

“The global scenario is positive. There is a relevant geopolitical discussion going on about tensions, whether between Ukraine and Russia, or between China and the United States. Which makes Brazil a very strategic place for several companies, so that in fact we can take advantage of this opportunity and make the country grow in a structural and sustainable way”, said Maluhy.

“We have to have a tactical agenda, it’s fundamental. But we need a long-term strategic structural agenda, to attack elements that make the economy and the country not grow at their maximum potential”, he concluded.

*The journalist traveled at the invitation of Itaú.