Expectation of interest rate cuts challenges BC communication – 07/31/2023 – Market

The Central Bank’s formal autonomy and the expectation of a reduction in interest rates challenge the monetary authority’s communication. The issue, which triggered clashes with members of the Lula (PT) government, is back in the spotlight this week, when the Copom (Monetary Policy Committee) meets to decide on the basic rate (Selic).

Economists heard by Sheet point out that the BC’s communication is part of the monetary policy “arsenal” by influencing the channel of expectations of financial agents and that there is now an effort by the institution to ensure that the interlocution is homogeneous.

But this model has been undergoing changes since the BC came under the crosshairs of President Lula, who is calling for a reduction in interest rates. Selic cuts are expected to start, today set at 13.75% per year, next Wednesday (2). While the government is pressing for a drop of 0.5 percentage points, the Copom speaks of “parsimony” and “caution” in conducting monetary policy.

The arrival of Gabriel Galípolo, former executive secretary of the Ministry of Finance, at the helm of the Central Bank’s Monetary Policy directorate shed light on conflicts related to different communication models.

During the sabbatine at the Federal Senate, in early July, Galípolo said that the BC has its “own language” and that, in each Copom meeting, Faria Lima [em referência a economistas da iniciativa privada] starts a world reading comprehension championship.

Ailton Aquino, nominated for the Inspection area, also said that he will defend improvements. “BC’s language is very hermetic, very difficult, and we need to do a very clear work on this, on improving the language.”

The most recent controversy regarding the BC’s communication revolved around the autarchy’s attempt to condition interviews with directors to the prior approval of President Roberto Campos Neto, as shown by the column Mônica Bergamo, from the Sheet.

The case made the institution manifest itself publicly, saying that “there is no censorship or restriction of any kind on the free expression of BC leaders” and that they “have been encouraged to demonstrate more in public.”

Luiz Fernando Figueiredo, former director of the Central Bank and chairman of the board at Jive Investments, points out that communication from the monetary authority is a ritualized process, with the aim of providing everyone with access to the same information simultaneously.

One of these rites is the Copom silence period. Committee members must “avoid as much as possible” commenting on matters that cover the Brazilian economy, such as interest rates, in the interval that runs from the Wednesday of the week before the collegiate meetings until the Tuesday of the following week, when the disclosure takes place. of the minutes.

For him, part of the “disagreement” around the issue is the result of the lack of knowledge on the part of critics, including President Lula, about this model.

“There is great care in how the BC communicates, which is very different from how the Ministry of Finance and other areas of the government communicate, because in these areas not everything is so sensitive. When you are in the BC, you cannot do [as mesmas] things you do when you’re at the Ministry of Finance”, he says.

According to Figueiredo, the BC is making an effort today to transmit positions that reflect the institution’s vision, not the individual opinion of its members. The former director, however, sees an ongoing process of transformation as people with different views arrive at the body.

“The BC’s formal autonomy slightly changes the format [de comunicação]there is a process of adapting the model to the new regime”, he says.

In force since 2021, in the management of Jair Bolsonaro (PL), “technical, operational, administrative and financial autonomy” is provided for by law. The text establishes fixed mandates of four years for the president and directors of the Central Bank, which do not coincide with that of the President of the Republic, with the possibility of reappointment to office.

Economist Carla Beni, professor of MBAs at FGV (Fundação Getulio Vargas), says that Brazil is still experimenting with this new regulation, which seeks to shield the BC against possible political interference, and that it needs more time to adjust.

“It is the first time that we are observing the function for which the BC became independent. Every president of the Republic will need to go through two presidents of the Central Bank, one inherited and one chosen”, he says.

She defends that the BC’s communication continues to be “regulated”, emphasizing that Brazil has a strong characteristic of the politicization of language.

Alexandre Schwartsman, former director of the Central Bank, considers it fundamental that the interlocution be made through official channels, such as the communiqué and minutes of the Copom and the quarterly inflation report, to avoid the risk of leaking privileged information.

For him, the divergences of Copom members regarding the course of monetary policy should be expressed during the meetings and, once the collegiate decision is taken, the position ratified by the majority must be publicly defended by all.

“Each director talking between meetings something different from the message that is in the official institutional communication is a delay”, he says.

“Being a BC director involves, yes, a partial resignation of the private opinion to the committee’s opinion. The private opinion goes to the debate; once a majority has been forged, you follow the majority’s decision”, he adds.

Sergio Werlang, adviser to the presidency of FGV and professor at FGV EPGE (Brazilian School of Economics and Finance), is in favor of a model in which BC directors can express their individual positions without restrictions.

“Apart from the period of silence, each director has the right to say what he wants. [Ele] he is speaking on his own behalf, not on behalf of the Copom”, he says.

“I see no reason why a director cannot expose his points of view, which need not be those of the majority. The BC’s vision is not one. The Copom is a combination of the views of its independent members”, he adds.

For the former BC director, giving more voice to each member characterizes an “improvement” of the monetary authority’s communication model, giving more “individual responsibility” for the ideas disclosed.

This individualization is in line with the practice adopted by the Fed (Federal Reserve, BC of the USA), defended by Galípolo. However, there is no consensus among specialists that this format is the best option for the Central Bank of Brazil, considering the historical and institutional differences between the bodies of the two countries.

The Fed has a decentralized operating system made up of three entities. One of them is the FOMC (American Copom), which includes governors of the body and presidents of regional central banks.

There is an understanding that this composition and long-standing institutional independence favor the resonance of more voices. On the other hand, critics argue that the Fed is not transparent enough about monetary policy decisions.