Uncertainty about exchange at the BC makes inflation at target difficult – 04/03/2024 – Market

The uncertainty surrounding the change of command at the Central Bank has made it difficult for inflation expectations to converge to the 3% target over the next three years, points out the head of the Center for Monetary Studies at FGV Ibre (Brazilian Institute of Economics at Fundação Getulio Vargas ), José Júlio Senna.

Another reason, according to him, is the lack of security regarding the future of public accounts.

Former director of the BC, Senna assesses that behind the de-anchoring of inflation expectations is investors’ fear that there will be a reduction in the Copom’s (Monetary Policy Committee) commitment to bringing inflation to the target with the change in the bank’s presidency. , which will take place at the end of the year.

The term of office of two other directors also ends on December 31st.

“Expectations are unmoored by two factors: doubts about the future of public accounts and uncertainties associated with the change of command at the BC. The problem is that the BC does not control these two factors”, says Senna to Sheet.

Inflation expectations for 2026 and 2027 have been stagnant at 3.5% for 39 consecutive weeks, and 2025 expectations have also been at this level for 29 weeks.

They had started to fall a little before the confirmation by the CMN (National Monetary Council) of the 3% target, at the end of June last year, but soon after they stopped at around 3.5%, above the level in force. in December 2022.

“If there was full confidence, they would have converged to 3%. But it didn’t converge,” he says.

For him, the problem of the transition in command of the BC does not exactly have to do with the names of those listed. “It’s more a question of the uncertainty it causes,” he says.

Two of the BC directors —Gabriel Galípolo and Paulo Picchetti— appointed by President Luiz Inácio Lula da Silva (PT) are in the race for Roberto Campos Neto’s seat.

The Ibre economist assesses the chance of a name different from the two, from outside the bank’s current board, being chosen by President Lula as less likely.

“There are two names of people who are already in the field, involved in everyday life at the moment”, says the former director. Anyone coming from outside would enter the game cold, he says.

Galípolo became close to Lula in the electoral campaign and was number two to Minister Fernando Haddad (Finance) at the beginning of the government until he was appointed to the BC’s Monetary Policy Directorate.

Picchetti is director of International Affairs and Corporate Risk Management and completed his master’s degree in economics at USP (University of São Paulo) in the same period as Haddad, in the early 1990s.

In an interview with GloboNews, the Minister of the Civil House, Rui Costa, spoke about the succession of the BC and a possible choice of Galípolo, whom he called an extraordinary figure.

“The choice is President Lula’s. It’s a good theory that the first name is always the strongest name,” he said.

Campos Neto has defended the anticipation of the transition process in command of the autarchy, due to the need for the next president to be questioned by Congress, which goes into recess at the end of 2024.

The current president of the BC usually talks about the need for a smooth transition and this Wednesday (3) he stated that the most important thing for whoever is sitting in the chair is to be firm and know how to say no.

“It would be good to do the hearing this year. If a director is interim president, he has to go through the hearing too,” said the economist during a Bradesco BBI event, in São Paulo.

Campos Neto Campos himself assessed that the scenario has become more difficult in the last month and a half for inflation, especially services.

This situation makes it more challenging to continue the disinflation process in the country in order to reach the target.

The Ibre economist highlights that, in the auction on Tuesday (2) of Treasury bonds linked to inflation (NTN-B), real interest rates rose a little more. The maturity date in 2060 reached almost 6%.

“A sign of market discomfort, not only in relation to the change in the Central Bank and the future of the fiscal system, but also with the concrete possibility that monetary policy in the US will remain tight for longer than expected”, says Senna. Higher interest rates in the United States make it difficult for rates to fall in Brazil.

According to him, the Central Banks of Brazil and the world are now fighting to overcome the so-called “last mile” of the fight against inflation. “It was already known that this route would be the most difficult. And they face precisely this problem”, he says.

Senna remembers that expectations above the target are an important problem and require more from monetary policy itself, in the form of higher real interest rates.