Haddad says BC statement is ‘very worrying’ and criticizes interest rate decision – 03/22/2023 – Market

The Minister of Finance, Fernando Haddad (PT), criticized this Wednesday (22) the decision of the Copom (Monetary Policy Committee) to keep the interest rate at the current level of 13.75% per year and said he considered it “very worrying” the tone of the statement from the Central Bank.

The Central Bank emphasized the “additional deterioration” of inflation expectations and left the door open to resume the cycle of interest rate hikes, if deemed necessary.

“I considered the statement worrying, very worrying, because today we released the bimonthly report of the Fiscal Responsibility Law showing that our projections for January are being confirmed on the public accounts [com déficit menor]”, Haddad told reporters.

The hard tone of the communiqué goes in the opposite direction of what the government of Luiz Inácio Lula da Silva (PT) wants, which has been pushing for a reduction in interest rates.

“The statement leaves it open. At a time when the economy is retracting and credit is in trouble, especially companies, families, the Copom even signals the possibility of an increase in interest rates, which is already the highest today of the world”, said Haddad.

“So obviously we read it very carefully, with consideration, but we think that the statement is really worrying, because depending on future decisions, we may even compromise the fiscal result, because soon you will have problems with companies selling , collect taxes. This is our concern”, said the minister.

Despite the criticism, Haddad recalled that, in the first Copom decision under the Lula government, the communiqué also came with a harsher tone, later softened in the release of the minutes of the Central Bank directors’ meeting.

“I hope this happens again, we hope this happens again. But we are going to send our analysis to the BC of what is most recommendable for the Brazilian economy to find balance. Balance in the trajectory of debt, inflation, public accounts , meeting social demands. This set of factors needs to be considered, according to the law that gives autonomy to the Central Bank”, he said.

He also recognized that the BC has been nodding in recognition of the efforts of the economic team to rebalance the accounts, but reaffirmed in different parts of his interview that the statement worried the government.

The minister called the deterioration of inflation expectations cited by the BC “conjunctural” and assessed that the institution should aim at the “fundamentals of the economy” in its decision on interest rates.

“There is nothing structural about this lack of anchorage. If there was something structural going on, we would have to be much more cautious. But expectations are something that change from one day to the next,” he said.

“We have to look at the fundamentals of the economy and ask ourselves if there is any imbalance in supply and demand that could lead to a resurgence of inflation in the coming months. And I think that, at this moment, from the point of view of the fundamentals of the economy, I don’t see that trend,” Haddad said.

In addition to the deterioration in inflation expectations, the BC also cites uncertainty about the new fiscal rule and its impact on expectations for the trajectory of the public debt as a factor that weighed in its decision. This Tuesday (21), Lula stated that the announcement of the fiscal milestone will be scheduled for April, when he returns from his trip to China.

Haddad, however, said he considers that the delay in disclosing the new rule did not influence the BC’s decision, since the legal deadline for sending the proposal is August 31, as established by the PEC (proposed amendment to the Constitution) of the Transition .

“This cannot have been part of Copom’s considerations at this moment. We are very cautious, with all the consultations recommended by the President of the Republic that have already been carried out”, he said.

The minister also argued that the government has been signaling a path of improvement in the accounts and said that it intends to “send” to the BC the most recent projections for the Budget, announced this Wednesday. In the bimonthly report evaluating revenues and expenses, the estimated deficit for the year fell from R$ 228.1 billion to R$ 107.6 billion.

“I repeat, it is a worrying announcement, because it opens perspectives that are not what we wanted [de aumento de juros]. And I repeat, we are going to take the bimonthly report of the LRF to the Central Bank, showing that our commitment signed in January is consistent and is being carried out and, therefore, this should provide security so that we can have a different trajectory”, he said. .

According to him, this “different path” in monetary policy is also important not to jeopardize the search for balance in public accounts. A significant slice of the Brazilian debt has interest linked directly to the Selic rate. In a deficit situation and with rising interest rates, Brazil needs to get into more debt to honor these commitments.

The government also fears the effect of interest rates on economic activity, which tends to slow down with a higher Selic rate. “The economy needs to be working for the accounts to break even,” said Haddad.

The minister pointed out that, in a more adverse environment on the international scene, Brazil is in a “different situation” from other countries, as inflation has already slowed down, but the interest rate remains high.

“Just compare it with European inflation. And the interest rate in the developed world, despite having risen, remains negative [em termos reais]. She is not positive. While our interest rate is the highest in the world, it is currently running, depending on how you do the math, between 6.5% and 8% above inflation,” she said.

Haddad also countered criticism from those who see statements by members of the government and the Minister of Finance on interest rates as a source of interference with the Central Bank.

“There is no noise when there is good faith. I am here in good faith, expressing an opinion that I think should be considered by the monetary authority […]. By the way, I’ve been talking about harmony since the first interview I gave back in December, about harmonizing monetary and fiscal policies. And I will continue to persevere towards that goal,” he said.

The Civil House minister, Rui Costa, echoed Haddad’s criticism. “This decision is not what the government expected,” he said. “This Central Bank’s insensitivity only increases unemployment and the suffering of the Brazilian people. It is not understandable”.