Mantega: BC and market blackmail government – 02/14/2023 – Market

In the assessment of former finance minister and economist Guido Mantega, the Central Bank (BC) adopted the basic interest rate as an instrument of pressure to force the permanence of a tight fiscal policy, along the lines imposed by the spending ceiling, which the government already warned that it will discard.

President Luiz Inácio Lula da Silva (PT) got the message and is absolutely right to react against Roberto Campos Neto, says Mantega.

The discord escalated after the statement released on February 1 by Copom (Monetary Policy Committee). The text, considered hostile among the president’s supporters, highlighted that “high uncertainty about the future of the country’s fiscal framework and fiscal stimuli that imply sustaining demand” forced the institution to maintain interest rates at 13.75% for a longer period.

“I think it’s arrogance on the part of the Central Bank to say ‘if you don’t adopt the fiscal policy that I think is appropriate, I’m going to keep interest rates high’. Can a guy who wasn’t elected, just been appointed, speak harshly to the president?”, asks Mantega .

He, who for nine years was a member of the CMN (National Monetary Council), the body responsible for setting the inflation target, is also in the group that defends the review of current targets, considering them unrealistic and part of the problem of high interest rates.

Mr. is still an economic adviser to the President Lula? I remain as I have been since the 1990s. Sometimes he consults me, and I send him messages. I haven’t spoken the last few days. Since the beginning of the government, he has been in a complicated situation, and he had the 8th of January [quando ocorreram os atos golpistas de bolsonaristas].

What made him so angry with the president of the Central Bank, even referring to Campos Neto as “that citizen”? The irritation is well founded. Lula was always sensible. He lost his temper because he was nervous about the situation. He’s seeing where it’s going.

President Lula assumed the commitment to establish a new social pact, so that we have a growing country, distributing income, and also with an increase in investments and profits. Monetary policy, as it stands, hinders this growth.

The situation of Americanas is not just tax fraud, it and other companies are there to show the effect of the contraction in growth and consumption. There was a reduction in purchases. An interest rate of this size also affects investments. Investment in real estate is already falling. The cost of financing has risen and people don’t take out credit at that rate.

It affects the state as well. On the one hand, tax collection drops, on the other hand, the cost of rolling over the debt is 6% to 7% of GDP per year. In 2022, the financial cost was BRL 600 billion.

But we had only one month of government, a single Copom meeting. It’s okay to get angry? You see, he’s worried because Central Bank decisions have a long-term effect. We had a reduction in inflation. It went from 10% to 8.8%, despite the fact that the Bolsonaro government has injected BRL 300 billion into the economy. The government withdrew taxes, and commodity prices also dropped. Inflation fell because of that, not because of that high interest rate.

We are starting the year with a decline in growth and employment. It is not, let’s say, a rosy scenario, and then the Central Bank says it will keep the interest rate at 13.75%.

The BC alleges that the fiscal scenario is uncertain, and the government has not yet forwarded the new fiscal rule. There was no time, but Minister Fernando Haddad [Fazenda] he even said that he will advance the presentation to April, well before the deadline.

The Treasury already has numerous proposals for changing the fiscal rule, but the minister said that first he would present the revenue increase package and the tax reform, leaving the discussion of the new framework for later. If the order had been different, maybe the conversation with the BC wouldn’t be different now? A PEC was presented and approved, forecasting R$ 167 billion for this year. The tax situation is set. We know what the spending above the ceiling will be, which is below the R$ 300 billion that Bolsonaro spent. Haddad is saying he will cut the year’s deficit by 1%. Nothing indicates that the government will be irresponsible. The economy is slowing down and inflation is on a downward path.

Why would people think this is inflationary? Why did expectations move? Sorry, this is bad technical prediction.

And what explains the rate at 13.75%? Today, 90% of the main economies have a negative real interest rate. I’m not talking about Turkey, which has 68% inflation and a 1% interest rate. I’m talking about the European Union, which has an inflation of 7%, 8% and has a negative real interest rate of 5%. I’m talking about the United States, which has 6% inflation and a 4.75% interest rate.

I’m not saying not to fight inflation. When you have inflation, you need to raise interest rates, but to what extent?

Jerome Powell, chairman of the Fed, the central bank of the United States, had been increasing by 0.5 percentage points and has now increased by 0.25. Inflation dropped from 9% to 6%. He is being prudent. Don’t play around with interest rates. If you misuse it, it’s deadly for the economy. Here is such an exaggeration. Brazil has the highest real interest rate in the world, 8%. Why? Are all other central bank governors incompetent?

Mr. Are you saying that the Central Bank’s monetary policy committee is not being technical and talking about a fiscal risk that does not exist? I’m saying you’re overreacting. In the statement, the Central Bank spoke aggressively. He is the one who is attacking and threatening. He wants to make fiscal policy. The role of the Central Bank is to take care of monetary policy.

What was considered aggressive in the statement? Signaling that it would keep this rate high for a long time because fiscal policy could be expansionary. I think it’s arrogance on the part of the Central Bank to say ‘if you don’t adopt the fiscal policy that I think is appropriate, I’ll keep interest rates high’. A guy who wasn’t elected, he was simply appointed, can he speak harshly to the president?

The Central Bank is independent, but it cannot be used as an instrument of pressure and remain oblivious to what the government is doing and expecting from the economy.

And the financial sector’s accounts are wrong and created the self-fulfilling expectation that future interest rates will rise. And they went up. They are doing a kind of terrorism. The Central Bank is in tune with the financial market, which is forcing a situation.

There it is easy to be president of the Central Bank. Inflation is falling, but no, he says he will keep interest rates at 13.75% to anchor expectations. What the Central Bank is doing is guiding expectations, and the market is aware of this.

Mr. Are you saying that the market works with an assumption that the government will be a spender? Yes, the market is assuming that the government might be a spendthrift. In fact, he is using blackmail to force the government to make the fiscal rule he wants. You want to replace the spending cap with another cap-like rule. There’s that arm wrestling too.

And there is still the issue of the inflation target, which is totally unrealistic. So much so that it has not been achieved for two years. A core target of 3.25% for the year 2023 will not be achieved. It will be three consecutive years with the BC sending the letter to explain why it did not comply.

Well, why not adjust?

But changing the inflation target now, in the midst of this stress, won’t it be worse? Revision of the inflation target is foreseen in the law, and it has been changed several times. I think the 4% target is more correct. The BC will continue to pursue the inflation target, but it may go more slowly. What would be the difference of having a rate of 12.5% ​​for example? Was the financial contraction not going to continue?

I think all of this is demonstrating that Central Bank independence has been poorly implemented. Does not work.

Is the fact that the government and BC did not achieve a certain alignment in one month, in this first experience of an independent BC, as proof that it went wrong? Lula is not against Central Bank independence. Without law, he practiced. But the Central Bank was not dissociated from the government. There was an attempt to tune in, so as not to be left with no head or tail.

I think the warrant could be along with the president’s. It was easy for Bolsonaro to create this model of independence because he put a person he trusts in, aligned with Paulo Guedes’ policy.

Now, a new government has to live with a Central Bank that is not tuned in, which makes meaningless decisions, such as maintaining that interest rate, then it doesn’t work. It paralyzes the country. I don’t even know if it’s possible to change now, but I think it would be ideal.

In the United States, the new government stays with the previous president of the Central Bank for one year. Here in Brazil, you have to spend two years with a Central Bank that is hostile to government policy.

Mr. knows that at the Copom meeting, the president’s decision does not prevail. Yes. There are 11 members, but most come from the financial market and have a high interest rate mentality. Mentality that even prevails only in Brazil. High interest rates harm the capital market, the heart of a capitalist economy. In the United States, the financial sector earns from stocks, so the interest rate doesn’t go up too much.

Recent history tells another story, doesn’t it? That same Central Bank of Campos Neto lowered interest rates to 2%. And he was right when he did that. I think he dropped too much. It could have gone to 5%. But there he was bold, because the world went into crisis and that helped the economy to recover, but then he changed his behavior, I don’t know why, and now this is being used to force the government to adopt the fiscal policy that the market wants. And the Central Bank got into it. The Central Bank must be independent not only from the government, but also from the financial market.

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X-RAY
Guido Mantega, 73

Born in Genoa, Italy, he holds a PhD in Sociology of Development from USP (University of São Paulo), where he also studied Economics and Social Sciences. Dedicated to academic life, he is the author of numerous texts and professor of Economics at the School of Business Administration at Fundação Getulio Vargas. He joined the PT in 1980 and began his public career in the management of Luísa Erundina in the São Paulo City Hall. He joined the coordination of the PT’s Economic Program in Luiz Inácio Lula da Silva’s campaign for the presidency of the Republic in 1989. In 1993, he started to act as Lula’s economic advisor, with a permanent presence in the party’s campaigns. With the PT in the federal government, he was Minister of Planning (2003-2004), President of BNDES in 2005 and Minister of Finance (2006 to 2014).