Roberto Campos Neto argued that it is still unclear what, from the recent turmoil, will or will not become more perennial
04/18/2024
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Roberto Campos Neto — Foto: Marcelo Camargo/Agência Brasil
Brazil’s Central Bank President Roberto Campos Neto got rid of the forward guidance that indicated a 50-basis-point interest rate cut for the next meeting of the Monetary Policy Committee (COPOM) in May and left open four possibilities. At an XP Investimentos event in Washington, he said that international and fiscal uncertainties have increased too much to allow the COPOM to keep the old promise.
On the other hand, he argued that it is still unclear what, from the recent turmoil, could remain in place for enough time to affect the Central Bank’s work in lowering inflation to the target—and consequently, the trajectory of the Selic policy rate.
Three weeks before the next COPOM meeting, Mr. Campos Neto listed four theoretically possible scenarios that could lead to different outcomes for the decision to be made on the interest rate.
First hypothesis: “We could see a reduction in uncertainty, which means we would follow the usual path.” He was not explicit about what the usual path would be, but apparently it would be a reduction in interest rates by 50 basis points, as was previously signaled, to 10.25% per year from 10.75%.
Second hypothesis: “We could have a situation where uncertainty remains very high, but it does not change significantly. That would mean a reduction in pace.” That is, the Central Bank would cut 25 basis points, to 10.5% per year.
Third hypothesis: “We could have a situation where uncertainty begins to affect more strongly important variables, and we would have to change the balance of risks.” Mr. Campos Neto was not explicit about what this hypothesis would mean for interest rates, but the logic of the gradation he employed seems to indicate a maintenance of the rate.
Fourth hypothesis: “We could have a scenario where uncertainty worsens, creating global stress. In this case, we would change our global scenario,” said Mr. Campos Neto. In this case, apparently, he is referring to the possibility of raising the policy rate.
This way, the Central Bank’s chief provided a sort of roadmap for the financial market to monitor the development of the recent crisis—international and fiscal—in order to anticipate the COPOM’s reaction to each of the situations.
And why didn’t he deliver a hawkish, more direct message? For him, with the current high degree of uncertainty, it’s difficult to anticipate the situation that the COPOM will encounter in three weeks.
“You do not want to react too much to short-term data, but at the same time you do not want to ignore a structural change to the point of losing your credibility,” said Mr. Campos Neto.
To know what the COPOM will do, it’s important to pay attention to what Mr. Campos Neto said about what is a surprise and what is not in recent events. It’s also good to re-examine the Central Bank’s so-called reaction function, that is, how it uses the new information that will emerge in the next three weeks to make its decisions.
He said he kind of expected the worsening in the international environment. This helps to understand why he said last week, after the release of U.S. inflation data, that the scenario had not changed substantially.
But another factor wasn’t in the Central Bank’s calculations: the deterioration of Brazil’s fiscal situation. Still, on at least two occasions he expressed doubts that this worsening will translate into a permanent increase in the risk premium. “When you change [the fiscal target], the premium moves further,” he said. “I hope that doesn’t happen.”
Mr. Campos Neto expressed concern, in particular, about the relationship between fiscal credibility and monetary credibility. The main indicator that the Central Bank has lost credibility will be inflation expectations, especially longer-term ones.
As for the monetary policy reaction function, the main message is that there is no mechanical relationship between fiscal policy, external environment, and monetary policy. It will be necessary to see how these recent events affect the COPOM’s central scenario for inflation and the balance of risks. This is what will determine which of the four hypotheses above will be adopted by the COPOM at its next meeting.
*Por Alex Ribeiro — São Paulo
Source: Valor International