Lula sets reasonable economic goals after noise – 06/29/2023 – Vinicius Torres Freire

The inflation target that the Central Bank must set was 3% for 2024, 2025, 2026 and out of sight, as there was the much-talked-about change in the system, from meeting targets in the said calendar year to a flexible horizon.

Maintaining the target was a reasonable decision by Lula 3. Changing the target date will not make any difference, if any. The irony is that, with this change, the Central Bank now has more autonomy, an attribute detested by a large part of the PT.

Leaving the target at 3% should result in some reduction in inflation expectations and longer-term interest rates, apart from other important changes in the domestic and international economic scenario.

It’s a free benefit. It had been a loss since part of the Lula 3 government and the PT leadership started to defend the increase in the target, thus imagining, in a sadly foolish way, that interest rates could fall (they rose, as was predictable).

As for changing the targeting system, the effect should be minimal. However, the presidential decree that will regulate it still needs to be known. Then there may still be some nonsense, such as setting a very distant date for the BC to hit the target. In any case, in practice, it is likely that the BC will end up deciding this deadline. A bad BC can irresponsibly push things with his belly or try to fulfill his mission with fire and iron, whatever the date determined by a decree.

Within the most reasonable universe, there shouldn’t be any major news because the BC tends to work with flexible horizons. In some administrations, like this one now, the BC’s board even explicitly announced that the setting of the target will be postponed, for sensible reasons. In case of price shocks (energy, droughts and wars or other world crises), it is not common sense to subject the economy to an interest rate stick in order to meet the target in a short period of time. At the very least, it causes excessive variation in GDP, among other problems. As it is easy to verify, this is what the BC has been doing at least since mid-2022.

It is also not clear if, how and when the president of the Central Bank will have to write the “mea culpa” letter about an eventual breach of the inflation target. In any case, not much attention was paid to such an explanatory statement. More attention is paid to what the BC says in its quarterly inflation report, in a deeper way, or in the minutes of the meetings in which the Selic is decided, in passing.

Even so, it would be convenient to create ways to hold CB directors accountable, here and around the world. These people have enormous power and, in practice, are almost not accountable for their actions (as far as monetary policy decisions are concerned).

With the decision of the National Monetary Council, the larger macroeconomic policy guidelines of Lula 3 are completed: there are targets for the balance (deficit or surplus) of public accounts, spending growth limits, inflation targets. It remains to be seen how the government will deal with such objectives, directly or indirectly.

That is, how are you going to increase the tax burden necessary for your spending and debt policy to work, are you going to change other interest rates (BNDES, for example), are you going to have a different trade policy (openness and agreements), what what will it do with state-owned companies or concessions for works and services for the private sector.

As for guidelines, the first semester of Lula 3 was better than expected, given the nonsense that has been heard since November, and although the fiscal target is very difficult to meet, with ugly risks of increasing debt. Still, so far Fernando Haddad has managed to put some order in the house.

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