Finance study says inflation target is not the cause of high interest rates

SÃO PAULO AND BRASÍLIA — A study prepared by the Secretariat for Economic Policy (SPE), linked to the Ministry of Finance, showed President Lula that the Inflation target in the country is not the main cause for high interest rates. The Treasury’s idea is to convince the president that the best way to achieve a reduction in the Selic rate — currently at 13.75% per year and considered exorbitant by the economic team — is not to focus efforts on increasing the inflation target.

Lula, according to government interlocutors, would have been impressed with the data, and that means that he can mitigate criticism of the inflation targets. Just yesterday, in an interview with CNN, the president did not mention the subject, despite having questioned the market and the autonomy of the Central Bank (BC).

The numbers that messed with the president’s head are in the table. In a list of emerging and developed countries, there are lower inflation targets than those of Brazil and yet our real interest rates are much higher, around 8%.

“It is not by raising the target that interest rates will fall, nor by reducing the target that inflation will also be lower. This seems clear in these data”, said a coach of the economic team.

CMN: 28-minute meeting

From 2005 to 2018, inflation targets in Brazil were set at 4.5%. Since 2019, however, they have been falling progressively and next year they will reach 3%.

Lula continues to think that the numbers are too low and this was reinforced by the speech of three heavyweights in the financial market, at an event held by the BTG bank this week, in São Paulo. But, for now, the president has convinced himself that this is not the main explanation for interest rates in Brazil.

Yesterday, the long-awaited meeting of the National Monetary Council (CMN) was quick and did not include a change in targets on the agenda. The meeting lasted only 28 minutes, started at 3:18 pm and ended at 3:46 pm. In addition to the Minister of Finance, Fernando Haddad, the Minister of Planning, Simone Tebet, and the President of the Central Bank, Roberto Campos Neto, technicians from the BC and from the ministries participated in the meeting.

The short meeting, however, was not the only commitment between Campos Neto, Haddad and Tebet yesterday. The trio had a reserved lunch in Brasilia. They remained together for more than two hours, with no technicians or advisors present.

The great fear of the Central Bank is that the increase in the inflation target will have an immediate effect on expectations. They would get higher and lead to an even greater tightening of Selic. Therefore, Campos Neto has said that the effect could be “the opposite of what was expected” by President Lula.

Another point that caught President Lula’s attention in the SPE data was the information that only Brazil and Turkey use inflation targets based on the calendar year. This obliges the Central Bank to bring inflation to the target obligatorily in the month of December of each year.

Otherwise, the monetary authority is required to prepare a letter to the Treasury to provide explanations. The idea is to discuss the possibility of changing the achievement of the target “in the relevant horizon”, that is, without a defined month.

Tax framework

The SPE study showed Brazil relatively in line with other countries in several indicators: current inflation rate, target deviation, foreign exchange reserves, country risk and gross debt. Therefore, the idea remains in the Executive that it makes no sense for the BC to keep keeping the Selic at 13.75%. The pressure on Campos Neto is likely to continue, mainly from PT politicians and grassroots members.

In the BC’s view, the main bet for reducing interest rates is on the presentation of the new fiscal framework, anticipated for March by Minister Haddad, and on tax reform. These two projects may give the Copom directors confidence to start cutting the Selic rate this year.

After yesterday’s meeting, the CMN reported that it evaluated the accountability of the Central Bank, which in 2022 presented a negative result of R$ 298.5 billion. This result is a reflection of the loss with operations with reserves and foreign exchange derivatives, which ended 2022 with a negative performance of R$ 326.5 billion. Other operations totaled R$ 28 billion.