Inflation: ‘2024 will already be an informal test for a continuous target’ – 06/30/2023 – Market

The year 2024 will serve as a “pilot” test for the Central Bank to manage the new continuous inflation target regime, with 3% as a target to be pursued, he says to Sheet Gustavo Guimarães, Executive Secretary of the Ministry of Planning and Budget.

The decision to migrate from the current system (which requires the BC to meet the goal at the end of each year) to a more flexible model was announced this Thursday (29) by ministers Fernando Haddad (Finance) and Simone Tebet (Planning and Budget) ).

In the new format, the monetary authority will need to seek the inflation level established by the CMN (National Monetary Council) without being linked to a closed calendar year, from January to December. The amendment will be formally valid from 2025.

“The advantage of the change being in 2025 is that we will still have a year running with the current model, but we can now follow how [o novo formato] it will work”, says number 2 of the folder, who actively participated in the discussions around the theme.

According to him, the decisions surrounding the modifications were “unanimous” within the CMN, formed by Tebet, Haddad and BC president Roberto Campos Neto. The main objective was to give a joint signal to ratify the target to be pursued and to improve the system —something considered crucial to maintaining the confidence of economic agents in the target regime.

In 2024, it will be the first time that the institution will have 3% as the center of the target, with 1.5 percentage points more or less as a tolerance margin. This level was set as part of the disinflation process decided in 2017, still under the Michel Temer (MDB) government.

Until then, the target was 4.5% per year, with a tolerance margin of 2 percentage points for more or less. In 2019, the central objective began to fall by 0.25 percentage points per year until it reached 3%, in line with other emerging economies.

Considering that the target will continue to be formally monitored in the current manner until the end of next year, the BC will have this deadline to improve the management of the mechanism without being punished in case of non-compliance.

For Guimarães, the continuous horizon system “is more demanding in terms of accountability to society than the calendar year.”

The secretary considers that, in the format of a closed year, it is accepted that the BC meets the target even if the IPCA (official inflation index) accumulated in 12 months is above the ceiling or below the floor in almost every month of the year, except in December —when verification of policy intent under current rules takes place.

This happened in 2014, when inflation showed a sharp deceleration in the final stretch of the year, allowing the government to meet the stipulated target, but it gained strength again in early 2015.

Such a mechanism, according to Guimarães, makes room for artificial maneuvers with the objective of ensuring the convergence of inflation to the target only momentarily, without this meaning a structural fight against rising prices —as would be desirable.

In the new approved model, any time the target is not met, the BC will need to explain. “If you fail to comply [a meta] once, I may already have to account to society for why I was left out [da margem] that month,” he says.

The means to be used for accountability is still under discussion. One possibility is to maintain the current system in which the BC president writes an open letter to the Minister of Finance justifying the overrun of the target and listing measures to resolve the problem.

There is still debate about the periodicity of these explanations, whether it will be charged in case the accumulated inflation is outside the target for a month or for a set of three months (consecutive or alternate), for example. According to the secretary, some proposals have already been brought to the table, but this is a “fine adjustment”.

“There is a convergence that accountability is important”, says Guimarães.

The secretary recalls that the BC autonomy law, approved in 2021, already provides for the biannual visit of the president of the monetary authority to the National Congress to provide clarifications.

According to the current rule, the head of the Central Bank “must present, in public hearing, in the first and second semesters of each year, an inflation report and financial stability report, explaining the decisions taken in the previous semester.”

In the view of the Secretary of Planning, an even shorter period of time could make the use of the instrument trivial, generating the opposite effect to that desired.

Although the subject is not closed, Haddad stated during the announcement of the reformulation of the inflation targeting system that the rendering of accounts by the Central Bank “tends to be more frequent”.