Inflation and other data prove that Campos Neto was right against Lula

About to start a trajectory of gradual interest rate reduction, the Central Bank places Brazil among the first countries to reduce the rate with controlled inflation, after the global monetary expansion that fueled the rise in prices around the world.

Market analysts predict that at the meeting this Wednesday (3) the Monetary Policy Committee (Copom) will reduce the basic rate (Selic) by 0.25 or even 0.5 percentage points, after exactly one year frozen at 13.75 % per year – the highest level since the beginning of 2017.

Among the most relevant markets, only Chile came out ahead of Brazil, with a cut of 1 percentage point in its basic rate last Friday (28), to 10.25% per annum.

In addition to collaborating to control inflation, the BC’s interest rate policy did not prevent the improvement of expectations for economic growth, and even contributed to the positive scenario that led the risk rating agency Fitch to raise Brazil’s credit rating, an indication that it has become safer to invest in the country.

“Whatever the reduction announced, it validates the success of the Central Bank’s strategy, showing that the restrictive monetary policy is still the best mechanism to control inflation”, evaluates Alberto Ramos, executive director of the financial group Goldman Sachs for Latin America .

Attentive to our inflationary memory, the Brazilian Central Bank was the first to raise interest rates after the start of the pandemic, while the world was betting on transitory inflation. In Brazil, Selic started to rise in March 2021, after reaching the historic floor of 2% per year.

At the time, the IPCA – the “official” inflation index – was close to 6% in 12 months, and rising. It reached 12.13% in April 2022, and then started to fall. In the most recent measurement, in June 2023, the accumulated inflation in 12 months was 3.16%.

Right now, after several downward revisions, the financial market expects the IPCA to end the year at 4.84% – the target pursued by the BC is 3.25%, with a tolerated range of 1.75% to 5 %.

“We must congratulate the Central Bank for having acted at the right time”, confirms finance specialist Hélio Beltrão, president of the Mises Brasil Institute.

This finding is relevant mainly due to the level of opposition to the monetary policy conducted by the president of the Central Bank, Roberto Campos Neto. Since the beginning of the government, President Luiz Inácio Lula da Silva (PT), ministers and supporters have not spared criticism of the BC’s work.

The president went so far as to say that Campos Neto “played against Brazil”. In Hélio Beltrão’s assessment, the criticism was a tactic by the government to elect a scapegoat for the poor performance of the economy that was emerging at the beginning of the year.

The pessimistic predictions were not confirmed. The good numbers of the economy demonstrate, among other factors, the correctness of the BC’s strategy.

“It is remarkable that the Central Bank has managed to bring inflation within the target without breaking companies and sectors. The scenario allows for a gradual reduction [dos juros]with control of the indicators”, observes Ramos.

“Blessed inheritance” of reforms helps to “breathe” the economy

In addition to the BC’s action, the “breathing” observed in the economy – with a reduction in inflation projections and an increase in GDP expectations – reflect the effects of the reforms carried out in the last six years.

Alberto Ramos remembers the “blessed inheritance” in the fiscal aspect. “We had already had two years with a surplus, an unprecedented fact in recent decades”, he says.

For Hélio Beltrão, “little by little the country is reaping the fruits of excellent consolidated micro and macroeconomic adjustments”. Among them are the labor reform, in the Temer government, and initiatives of the Bolsonaro government such as the pension reform, the Economic Freedom Law and other liberalizing actions.

The international risk rating agency Fitch attributed the “above-expected macroeconomic and fiscal performance” to proactive policies and reforms in recent years.

More recent factors, such as the extraordinary performance of agribusiness and the favorable international context – with the drop in commodity prices, mainly fuel – also contributed to the favorable numbers for the semester.

On the part of the government, the approval of the fiscal framework, although anchored in the increase in collection, signaled to the market some rule to try to balance expenses.

Attempt to reverse BC autonomy did not work and loses strength

Amid recurring criticisms of Campos Neto’s actions, the government made clear its intention to revoke the Central Bank’s autonomy. Among the arguments for the retreat, PT supporters claimed that the president of the Central Bank had not been elected and that “he was not the owner of Brazil”.

The government also tried to disqualify Campos Neto’s technical performance, suggesting his link to former President Bolsonaro, who appointed him to the post. Lula also proposed modifying the inflation target, in order to allow more tolerance for price increases.

So much noise only increased instability, which worsened inflation expectations and delayed the beginning of the fall in interest rates.

The attempt to review the BC’s autonomy, however, did not prosper – it was discarded by the mayors, Arthur Lira (PP-AL), and Rodrigo Pacheco (PSD-MG), who defended the formal independence granted to the monetary authority by Congress itself. in 2021.

The perspective of the end of autonomy, according to analysts interviewed by the People’s Gazetteweakens even more now, with the confirmation of the results of the BC’s technical strategy.

For Ramos, the technical and independent performance of the monetary authority was demonstrated throughout the cycle of raising interest rates, which began during the Bolsonaro administration.

In the 2022 election year alone, the BC readjusted the Selic rate five times, raising the rate from 9.25% to 13.75%. “No one thinking politically would raise interest rates four months before the election”, emphasizes the director of Goldman Sachs.

The Central Bank’s technical performance was attested by a recent study by the Millenium Institute, which analyzed Copom minutes since 1999 using artificial intelligence.

The conclusion ruled out relevant differences in communications from one government to the other. “The hypothesis that the minutes of the Central Bank would have hardened in the current government, due to the ideological difference, was not confirmed by the results of this study”, concluded the data scientists Geraldo Leite and Wagner Vargas.

The Fitch agency, in the announcement of the upgrade of the Brazilian rating, praises the performance of the BC, stating that it “conducted a prudent and proactive monetary policy during the recent inflationary shock and kept the Selic rate at 13.75% since August 2022, in amidst fiscal uncertainties, stickiness in core inflation and some upward shift in expectations for higher prices”.

For Beltrão, although the revocation remains on the government’s radar, the BC’s autonomy is not at immediate risk. He believes that, in addition to the vigilance of Congress, the press and society, the institutionalization of the BC will prevent deviations and the politicization of decisions.

Even with the end of the mandate of the current President Campos Neto, scheduled for 2024, the new name indicated by the President of the Republic will be subject to the established rules and the Board of Directors. “These are technical members, all with master’s and doctoral degrees, experienced and responsible in conducting monetary policies”, he assesses.

Prospects are not encouraging without structural reforms of the State

Even with the favorable scenario and the beginning of the trend of falling interest rates, for analysts there is not much to expect from economic growth. “We have a history of low growth and we’ll be lucky if it doesn’t get worse”, says Hélio Beltrão.

The good news, for him, is that Congress has blocked setbacks intended by the Executive. But there are no structuring reforms on the horizon that foster economic growth and adjust the size of the State, such as administrative reform.

Recently the president of the Chamber cited this reform as a priority in the second half, but the government is working to postpone the discussion.

For Alberto Ramos, even the tax reform, approved in the Chamber, did not seek to reduce the tax burden and should not contribute to the fiscal adjustment. “This government’s strategy is to collect and spend, ‘tax and spend'”, he observes.

The little growth forecast for 2023 and beyond seems to be anchored in more sector-specific policies, which he calls “microeconomic activism”. It may have some effect in the short term, but nothing that ensures sustainable growth. “The last 20 years demonstrate that it is not possible to be optimistic and expect anything beyond the so-called chicken flights”, he says.