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Central Bank will have to cut interest rates after fiscal plan, minister says

Planning Minister Simone Tebet says that after Congress passes new rule there is no reason for Selic not to fall

05/02/2023

Simone Tebet — Foto: Ton Molina/ZUMAPRESS.com/Newscom

Simone Tebet — Foto: Ton Molina/ZUMAPRESS.com/Newscom

Planning Minister Simone Tebet is working based on the approval of the fiscal framework by the Chamber of Deputies in May and the Senate in June. With this, the Central Bank (BC) will have no alternative, she says: “There will be no more excuses not to lower the key interest rate Selic at Monetary Policy Committee (Copom), even by 25 basis points. For every condition that the Central Bank sets and that we solve, they will set others. What else will they do? After this week’s meeting, Copom will meet on June 20 and 21 and then on August 1 and 2.”

The minister’s experience in the Covid investigative parliamentary committee (CPI) gives her confidence to say that the mixed investigative parliamentary committee (CPMI) on January 8 will not mobilize the population in the same way, and therefore will not affect the processing of the tax reform. “In this CPMI people were scared and wanted vaccines, now they have turned the page and want jobs.”

The following are key excerpts from the interview Mr. Tebet gave to Valor:

Valor: The fiscal framework can only be sustained with new revenues. What makes you sure that the government will have them?

Simone Tebet: The framework aims to control public spending and stabilize the debt in the medium term. The debt would reach 90% of GDP in ten years. Only the framework guarantees that it will be around 85%. With a tax reform starting in 2025, the GDP could grow by 20% in 15 years. The concern with the target is within this perspective. Just as the inflation target is important, the primary target is fundamental because no one can spend more than they take in. Besides, we will only spend 70% of the real increase in revenue. I need R$150 billion, but if we get R$125 billion I will stay within the band with a deficit in the first year. If I don’t get the revenue I want, I will achieve the main goal of the framework, which is to contain spending. I will have to do it anyway. There is the Budgetary Guidelines Law (LDO), the Federal Audit Court (TCU), and Congress, which can call the economic team at any time to evaluate compliance with the framework. The ruling against the use of the sales tax ICMS rebates on taxable income already guarantees half of this revenue.

Valor: But this was in the Superior Court of Justice (STJ), and it still needs to go through the Federal Supreme Court (STF).

Ms. Tebet: But with a score like this, 9 to zero, the action comes with force in the STF. The court has already shown that it has a broader vision of its role today. It is the role of guardian of the Constitution but with a more systemic interpretation. And from this point of view, to understand that if the federal government cannot approve projects that affect states and municipalities without compensating them, the reciprocal is also true. The legal argument is strong. The states can give incentives but cannot jeopardize federal revenues. From a legal point of view, we are well founded, but in addition to this, the STF is aware that if we want to have fiscal responsibility, and this is fundamental to influencing the fall of interest rates, we need to increase revenues.

Valor: Doesn’t the fact that it is a decision that puts the federal government on one side and the Brazilian Agribusiness Association (Abag) on the other, make the relationship with the sector even more conflicted?

Ms. Tebet: The agribusiness environment is conflicted for other reasons. I come from agribusiness. It has much more to do with the invasion of productive lands, and the demarcation of Indigenous lands without adequate compensation in cash. Because it is not a problem to demarcate areas for the productive sector, as long as it is paid in cash, because the Constitution gave a deadline of five years and they have not demarcated, they have not done their homework. It is necessary to change the Constitution so that it is paid in cash and not in agrarian bonds. The agribusiness issue is much more the land issue than anything else. Agribusiness is willing to discuss tax reform. I met last Thursday the president of the Agribusiness Parliamentary Front, Pedro Lupion, and he is willing to discuss the reform, where you lose and where you win.

Valor: An important part of the tax expenditure is on agribusiness. Is the sector ready for the end of the tax cuts?

Ms. Tebet: There are two packages. In the first, on January 12, there was the spontaneous denunciation in Carf [Administrative Council of Tax Appeals] and the review of contracts of the past administration which could reach R$20 billion. Some of these revenues are permanent, others are temporary. R$150 billion has been announced and is 30% of the total. The second package includes the judicial risks, where the Federal Attorney General’s Office (AGU), the Ministry of Planning, and the Ministry of Finance have been working and are going through this victory in the STJ and could generate R$70 billion, and the taxation of electronic gambling, which nobody knows exactly, but could generate R$10 billion. And a third package, if these measures are not enough, will be the tax expenditure.

Valor: The framework was well received, but the party leaders have already warned that they will not accept the decriminalization of the Fiscal Responsibility Law (LRF). Was it a mistake to include this in the framework?

Ms. Tebet: No. It was a misinterpretation. The LRF never prevented the government from not complying. A target is a target. If I have external factors that prevent me from meeting the target, like a pandemic, we send a bill, and the Congress changes the target. The problem with [former president] Dilma [Rousseff] is that no law allowed her to change the target. If Congress wants to adjust, there is no problem, as long as it is in the institutional aspect. We have to satisfy the Congress; we have the TCU on our back.

Valor: When is the final approval of the framework expected?

Ms. Tebet: We know that when the Speaker of the Chamber gives his word, he keeps it. We have a good channel with the rapporteur, lawmaker Claudio Cajado and we were in the Senate this week and I didn’t see an angry opposition. The fiscal agenda is the right-wing agenda.

Valor: Do you think the president of the Central Bank was convinced in that Senate hearing?

Ms. Tebet: At that hearing, I was clear when I said that there is no contradiction in the Central Bank defending the inflation target and arguing that the interest rate controls inflation because inflation is a harmful tax on the poorest people. But there is also no contradiction when the government asks whether the 13.75% interest rates are correct. Are they justified? And what is this inflation? What are these factors? Are they the same as in the past? The war in Ukraine continues, and the pandemic has impoverished the world, as we know, and inflation has increased because of this. A review of inflation is needed. And the kind of inflation is temporary, it is seasonal. This analysis has to be done. I have seen Arminio Fraga [former president of the Central Bank] talking more about social issues than Roberto Campos [Neto]. The country doesn’t just have fiscal risk. It has fiscal and social risks. We see the liberals talking about this. Within this process, I believe that by the middle of the year, the framework will be voted on, and the Central Bank will have no choice but to lower interest rates. I have seen Marcos Lisboa [former Secretary of Economic Policy at the Finance Ministry] and Arminio Fraga clearly say the following: interest rates are related to fiscal policy. We are authorized to end the year with a deficit of 2% of GDP, but we are showing that we are going to end with half of that, or less than half.

Valor: But Arminio Fraga also said that the math does not add up…

Ms. Tebet: He says that the math does not add up because the increase in revenue has not yet been officially presented to him. That’s why this STF decision is important for us to plan our future steps. The discourse of the Central Bank in the last Copom meeting is that the Central Bank doesn’t work with expectations. It works with interest rate expectations, but not with expectations of approval in Congress. But everything is moving towards approval in May in the House and in the first week of June at the latest in the Senate. Once approved, what will be Copom’s excuse for not lowering interest rates, even by 0.25 percentage points? Every condition that the Central Bank sets and that we solve, they will set others. What will they do now?

Valor: Won’t the CPMI on January 8 interfere with the package approval?

Ms. Tebet: The commission will not interfere with the work in Congress. It is different from the CPI of the Pandemic. In the latter, society was indoors, terrified, and people wanted to know about the vaccine. Now people want to eat and want jobs. They haven’t experienced January 8th up close. The population has already turned the key, in this aspect: I am still right-wing, I am against Lula, but I don’t want Bolsonaro. The radical bubbles represent 7% to 8% of social media. It will not get in the way of the package approval. If Arthur Lira wants, he will put it in the plenary.

Valor: Taxes too?

Ms. Tebet: It will pass in the first half in the Chamber and at the end of the second half in the Senate. We have to make concessions in education, health, and services, and then it will pass.

Valor: And then it goes back to the Chamber?

Ms. Tebet: They can pass what is concurrent and leave what is not concurrent for a second pass.

Valor: During the Senate hearing, they asked for an administrative reform that would inevitably affect the judiciary. Given the dependency of the executive on the judiciary in the fiscal agenda today, is it appropriate to pursue it?

Ms. Tebet: This is not reform for the immediate future. It may be that in the second semester after the Chamber has passed the tax reform, Mr. Lira may want to take up the proposal to amend the Constitution, the PEC 32 (the so-called Transition PEC) again, but I wouldn’t worry about it now. It is a mistake to say that this reform will disturb stability, it is enough to regulate Fernando Henrique [Cardoso]’s reform. The big reform is to reduce the cost of the state apparatus, from the single medical record in Brazil’s public healthcare system (SUS) to the digitalization of the whole state apparatus. This brings quality to public spending and reduces the number of public servants.

Valor: Four months later, how do you rate the government?

Ms. Tebet: I was surprised by the quality and the political will to serve of the new ministers who, with small structures, are committed to showing Brazil ways out, in the Ministries of Racial Equality [Anielle Franco], Human Rights [Silvio Almeida], Women [Cida Gonçalves]. And also in the Environment, which is being organized over time. There is an involvement, a commitment to Brazil, and a loyalty to the country. Everyone is fighting for funds and social issues, for what matters, for the collective good. A lot of determination to get results. It is not because I am a liberal that my role is to cut spending. It is to find space for the social. I am interested in the quality of spending, in ridding the state of what is superfluous, what goes down the drain.

*Por Maria Cristina Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Central Bank does not know when interest rates will fall, director says

Director of international affairs reiterates that curbing inflation is top priority

04/04/2023

Fernanda Guardado — Foto: Gesival Nogueira/Valor

Fernanda Guardado — Foto: Gesival Nogueira/Valor

Fernanda Guardado, the Central Bank’s director of international affairs, says it is impossible to know when it will be possible to start cutting Brazil’s key interest rate (Selic), currently at 13.75% a year. Currently, the market’s economic analysts see the beginning of the monetary easing in November.

“We will be able to think about cuts when we are more certain of the process of convergence of inflation to the target, when we are more confident that inflation is evolving in the way we expect,” she said. “For now, it is not possible to say when.”

According to her, the Central Bank’s Monetary Policy Committee (Copom) is on a “crusade” to tackle inflation, which she assesses is at a very high level. “Just note that we ended with inflation at 5.8% in 2022, and the Central Bank projects that it will end 2023 at 5.8%,” she told Valor. “We need to have patience and serenity in this process.”

Last year, Ms. Guardado was a dissenting vote in defense of a residual interest rate hike, which would take the Selic to 14% per year, because she had doubts about the evolution of the economic slack, technically known as the output gap. Today, she says she is more confident that the slack is evolving as expected. “That gives us a little more comfort that our strategy is having an effect.”

Still, the scenario for interest rates outlined then, which opened up a possibility of a first cut, has changed. The labor market proved resilient and inflation more persistent, especially in services. “We had this de-anchoring of expectations, which in this environment increases the cost of disinflation.”

The Central Bank director, who has a Ph.D. in economics from PUC-Rio, acknowledged, on the other hand, the efforts of the Finance Ministry in conducting fiscal policy. “It is important to recognize that, along with the end of the fuel tax holiday, the publication of the fiscal framework still in March reinforces the commitment of the Ministry of Finance to the package that was announced in January,” she said. “But the framework still has a long way to go for discussion in Congress.”

She refuted, in the interview that follows, accusations that the Copom has been too conservative in monetary policy. “We at the Central Bank also want to have lower interest rates sustainably. But we also want to have a low inflation rate.”

She also disputes accusations that the Copom, whose majority of members were appointed in the Bolsonaro administration, would be acting politically. “The interpretation that the Copom’s work is political is not only factually wrong; it is also very unfair,” she said. “It is unfair to the dozens of civil servants at the Central Bank who produce the analyses that underpin these decisions.”

She explains that the mention in the Copom minutes that the committee could raise interest rates — which aroused reactions from some people in the Lula administration — is nothing new and has been part of the communication since September 2022. “It is a way of signaling that the Central Bank will not shy away from doing whatever is necessary if the situation deteriorates further and so demands it.” Read the main excerpts from the interview below:

Valor: Many people complain that Brazil is the champion of high interest rates in the world. Why does the Central Bank not lower the Selic?

Fernanda Guardado: I understand this frustration. We, at the Central Bank, also want to have lower interest rates in a sustainable way in Brazil. But we also want to have a low inflation rate. Right now, our focus is on fighting inflation, which has been persistently high for quite some time, and bringing inflation toward the targets that have been determined by the National Monetary Council (CMN). Very high inflation is particularly detrimental to the poorest people. An autonomous Central Bank is autonomous precisely to be able to make these decisions that bring a cost to the economy in the short term, but that will guarantee a better and more predictable result for everyone in the long term.

Valor: One argument against high interest rates is that we allegedly have supply inflation, but the Central Bank insists that we have demand inflation. Where is it?

Ms. Guardado: I think it is important to think about how the movie of this inflationary process was. It started in 2020, because of the fiscal and monetary stimuli all over the world, and also in Brazil. This boosted the demand for goods. The service sector was depressed. As time went on, we saw a slowdown in the consumption of goods and a boost in the demand for services. The service sector has been the most resilient in recent quarters. So, when I see this discussion between demand and supply, I ask myself: which demand? Demand for goods? For services? Looking only at the aggregate consumption data might hide a little what is happening underneath. Not surprisingly, services inflation has been quite resilient. It ended 2022 near 8%, and it is quite inertial. It will only gradually slow down.

Valor: It has attracted a lot of attention that the Copom said at the last meeting that, if inflation does not move as expected, there could be an increase in interest rates. Is the Central Bank thinking about this hypothesis?

Ms. Guardado: This excerpt has been in the Copom statements since September 2022. It’s not new. It is a way of signaling that the Central Bank will not refrain from doing whatever is necessary if the situation deteriorates further, and so requires.

Valor: Do you mean that there is actually a possibility of raising interest rates? Is there any danger on the horizon that justifies the warning?

Ms. Guardado: We have observed moderation in the economic activity and some deceleration in inflation, which are in line with the scenario we had projected in Copom. However, we have also observed a de-anchoring of inflation expectations for the longer term. This is a development that we follow attentively, but we will observe at each Copom meeting all the available set of information and then evaluate.

Valor: The economists consulted in the Focus survey predict the first interest rate cut in November. Would it be necessary to wait that long, or could it be lowered earlier?

Ms. Guardado: We could think about cuts when we are more certain about the process of convergence of inflation to the target, when we have more confidence that inflation is evolving in the way we expect. For now, it is not possible to say when. I want to stress that it is our crusade to fight this level of inflation, which is still very high. Just note that we ended 2022 with inflation at 5.8%, and the Central Bank projects that it will end 2023 at 5.8%. A non-existent marginal disinflation, and with cores still very high. We must have patience and serenity with this process.

Valor: In the last minutes, Copom followed a road map of what was analyzed, including inflation projections, the balance of risks, expectations, economic slack, and services inflation. Which is the most important for the decision of interest rates?

Ms. Guardado: The road map is the same. We analyze the expectations, the evolution of the balance of risks, and the evolution of services inflation, with a special weight, because it has a more inertial character and is closely linked to the cycle of aggregate demand and economic activity in general.

Valor: How does the Copom expect these factors to evolve?

Ms. Guardado: In the case of cores and services inflation, we expect to see an evolution compatible with this projection. And we will evaluate whether it is compatible as time goes by. As for expectations, ideally, they should be anchored to the targets that were determined by the CMN. They were anchored until the end of 2022.

Valor: Central Bank President Roberto Campos Neto complained last week about the politicization of the Copom statements. Doesn’t Copom’s work ends up being a little bit political, since those who decide have their subjective views?

Ms. Guardado: The interpretation that the Copom’s work is political is not only factually wrong but also very unfair. It is unfair to the dozens of Central Bank employees that produce the analyses that underpin these decisions. We have several departments in the Central Bank that are involved in this analysis which culminates with the Copom’s decision. The Central Bank specialists bring very detailed analyses of the international scenario, domestic inflation, domestic activity, of the credit market. All in a very detailed and technical manner. These analyses help support our decision. It is a purely technical decision, which takes into consideration the technical aspects and the set of information about the economy, always aiming at the convergence of inflation to the targets determined by the CMN.

Valor: The latest inflation projection by the Copom exceeds the target, even assuming that interest rates will not fall. Does this mean that the monetary tightening is insufficient?

Ms. Guardado: Although the Selic is at a very high level — and there is a lot of criticism around this level — our disinflation strategy is slow. This happens in observance of our secondary objective of smoothing out the cycles of activity. If we were going to aim for inflation convergence still in 2023, the interest rate level would have to be much higher. What we are projecting is this disinflation trajectory until the end of 2024. The disinflation of expectations increases the cost of disinflation. Then we have a situation in which this tighter rate has to remain for a longer period to ensure the convergence of inflation.

Valor: Last year, you dissented in a vote for a small interest rate hike because you were in doubt whether the activity would slow down and create economic slack to make inflation decline. How has your view evolved?

Ms. Guardado: What we did see was an upward revision in the output gap calculated by the Central Bank [a measure of economic slack] at the end of last year, but it was very marginal. At that time, there was a big debate about how close to zero the gap would be. Since then, with the evolution of the economy and from what our projections indicate, the direction of the gap is of some opening in the coming quarters. This gives us a little more comfort that our strategy is working.

Valor: In that period, the Copom even signaled the possibility of starting to cut the interest rates from June on. What happened to make this scenario change?

Ms. Guardado: Since then, we had not only activity data which, although showing a slowdown in the second half, had a relatively resilient economy, in particular the labor market. We continue to observe — and I think this became clearer throughout this first quarter — that there is still a certain persistence in inflation. Service inflation, as we have been saying for some months now, is a major focus of attention for the Copom, and it continues to be quite high. Of course, we saw a de-anchoring of expectations, which in this environment increases the cost of disinflation.

Valor: A frequent criticism of expectations is that they reflect the vision of the market, which would like to see high interest rates. Is this criticism correct?

Ms. Guardado: The Central Bank uses expectations in its models following the best international practice. They are very important because they serve as a beacon, often for economic agents that don’t follow inflation in detail, and don’t have a very well-formed opinion about what is going to happen with inflation. As this beacon, they often indicate what workers and companies believe will happen with inflation, if it will accelerate, if it will slow down, and if it will be on target or not, to base their adjustments of prices and salaries.

Valor: One reason for the de-anchoring of expectations is that there may be a change in the inflation target. Shouldn’t the Central Bank just take into account that the government is discussing, in a legitimate way, the target?

Ms. Guardado: It is important to reinforce that the target is a government decision. The Central Bank only has one vote within the CMN. It is up to us to follow the target. What we noticed and what we put in the Copom minutes is that this de-anchoring increases the cost of the disinflation that we are trying to undertake. Decisions that allow a re-anchoring of expectations could reduce this cost.

Valor: Is the Copom divided in its diagnosis about whether the deceleration of credit is too strong?

Ms. Guardado: No. I think it is important to emphasize that we believe in the principle of separation. We observe that the interest strategy is focused on our primary objective of keeping inflation in line with the CMN targets and we have several instruments of liquidity, and macroprudential ones, that have even been used in the past, to address problems in the bank credit market, should they arise. What we have debated in the Copom is a little more about the degree of deceleration. It can be observed that in some segments there is a somewhat stronger deceleration of this level of credit. But the Central Bank is ready and has the instruments to act if relevant frictions arise.

Valor: Some members of the Copom think that the deceleration is much stronger in some segments. Doesn’t it mean that the economy can slow down more than expected?

Ms. Guardado: Our perception is that, for the time being, in the aggregate, the credit decelerates at a level compatible with the contractionary monetary policy.

Valor: What is your view on the fiscal framework recently announced?

Ms. Guardado: It is important to recognize that, along with the end of the fuel tax holiday, the publication of the framework in March reinforces the commitment of the Ministry of Finance to the package announced in January. But the framework still has a long way to go for discussion in Congress. We need to have serenity and patience with this process that will unfold. I would like, however, to highlight what we have already written in the minutes there is no mechanical relation between the convergence of inflation and the presentation of the framework. The convergence of expectations toward the target is very much conditional on the behavior of inflation expectations, of current inflation itself, and of asset prices.

Valor: The Copom removed an excerpt it used to include in its minutes about the impact of fiscal policy on aggregate demand. Today, is this fiscal driver less of a concern for the Copom?

Ms. Guardado: In our minutes, we wrote that this decision to end the fuel tax holiday, which was already incorporated into our baseline scenario, was in a way a good step towards reducing eventual policies of support to the aggregate demand.

Valor: Should the Central Bank be more cautious after the banking crisis in the U.S. and Europe?

Ms. Guardado: In the United States and Europe, the recent stress events in some banks have increased a little the risks around the scenario. At the same time, both in the United States and in Europe, we have seen some resilience in activity, but mainly in inflation. This increased the chance that we will have more lasting inflationary persistence. On the other hand, with the bank stress scenario, there is the risk of a stronger credit slowdown there as well. How have the central banks dealt with this? By using the principle of separation. Both in the United States and in Europe, there is still a process of interest rate hikes, and they tried to deal with the banking problems, each one in its own way, using other mechanisms. In Brazil, we have not noticed an impact of these international stresses on the banking system.

Valor: How is the preparation for Brazil’s G20 presidency going?

Ms. Guardado: We are very excited about the prospect of Brazil hosting the G20 in 2024, and we also see great expectations from the other G20 members with our presidency. We have great communication with the Finance Ministry in the organization of this event.

Valor: How is the appetite of investors towards Brazil with the change of government?

Ms. Guardado: We have observed a lot of interest. Brazil has a positive evaluation of monetary policy conduct. There are some questions on more structural issues. As important measures put forward by the Finance Ministry evolve, such as the framework and tax overhaul, the interest is likely to increase.

*Por Alex Ribeiro — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Central Bank keeps key interest rate at 13.75% amid government attacks

Policymakers showed concern with de-anchored inflation expectations

03/23/2023

Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

Despite pressure from the government to bring forward the start of the cycle of the Selic rate cuts, the Central Bank’s Monetary Policy Committee (Copom) decided on Wednesday to keep the key interest rate unchanged at 13.75% per year on Wednesday night. The policymakers showed concern with de-anchored long-term inflation expectations.

In the statement released after the decision, the Copom signaled that the interest rates are likely to remain at the same level by reiterating that it remains “vigilant” and will analyze if the strategy of maintaining interest rates “for a longer period” will be enough. The Copom also said the Central Bank will “set monetary policy to meet the targets.”

“The Committee emphasizes that it will persist until the disinflationary process consolidates and inflation expectations anchor around its targets, which have shown additional deterioration, especially at longer horizons,” the Copom said. In addition, the policymakers wrote that they will “not hesitate” to resume the tightening cycle if the disinflationary process does not proceed as expected.

This was the second meeting of the Copom in the Lula administration. President Luiz Inácio Lula da Silva has publicly criticized the Central Bank’s interest rate policy and pushed for a reduction in the Selic key interest rate. While acknowledging that the reintroduction of fuel taxes has reduced uncertainty about short-term fiscal outcomes, the Copom argued that the easing of expectations requires attention in the management of interest rates.

According to the document, the Central Bank believes that the recent increase in market projections increases the cost of disinflation, which in practice requires further monetary tightening. The Copom’s projections have risen and remain above the targets in the reference scenario, which uses the Focus, a weekly survey with analysts, for the key rate. In the survey, analysts forecast the start of cuts in November. In a survey conducted by Valor and published this week, the expectation that the cuts will begin in September prevails.

The Central Bank estimates are 5.8% for 2023 and 3.6% for 2024, which have targets of 3.25% and 3% respectively, both with a tolerance of 1.5 percentage points more or less. Normally, the Copom targets calendar years, but since August it has started to emphasize 12-month inflation over the relevant horizon for monetary policy, which is currently the third quarter of 2024. For this period, the inflation forecast is 3.8%.

In line with the strategy of keeping interest rates high for longer, the Central Bank has once again published an alternative scenario for projecting inflation with the Selic rate at current levels for longer than expected by economic agents throughout the relevant horizon. In it, the percentages fall to 5.7% in 2023, 3.3% in the third quarter of 2024 (the current focus of Copom), and 3% by the end of next year.

The committee also made some changes in the balance of risks to inflation, including a possible stronger slowdown in credit and the banking crisis abroad, but maintained the balance between factors that could lower inflation more than expected or cause it to rise.

Among the risks, the Copom cited “the uncertainty about the fiscal framework and its impacts on the expected path of the public debt.” In this excerpt, it failed to list the risk of a fiscal stimulus that would lead to sustained aggregate demand. There was also no mention of the greater or more persistent de-anchoring of longer-term inflation expectations and the possibility of greater persistence of global inflationary pressures.

Among the downside factors, the Copom cited a “a slowdown in domestic credit concession larger than what would be compatible with the current stance of monetary policy” and, with regard to the aforementioned risk of a slowdown in global activity, added that this could occur “particularly due to adverse conditions in the global financial system.”

The statement also expressed concern about the global environment, which has “deteriorated” since the committee’s last meeting. “The episodes involving banks in the United States and Europe have increased the uncertainty and the volatility in markets and require monitoring. At the same time, recent data on global activity and inflation remain resilient and the process of monetary policy tightening in major economies continued to advance,” the Copom wrote.

With regard to the domestic scenario, the Central Bank highlighted that the latest indicators of economic activity “continues to be in line with the deceleration expected by Copom,” even amid warnings from market participants that a possible halt in the credit market could lead to a greater fall in the economy.

Moreover, the Copom reiterated that consumer inflation, as well as its various measures of underlying inflation, remain above the range compatible with achieving the target.

*Por Larissa Garcia, Alex Ribeiro — Brasília, São Paulo

https://valorinternational.globo.com/
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Central Bank to begin testing digital currency

Monetary authority chooses network configurations that will integrate with the current payment system

03/06/2023

Roberto Campos Neto — Foto: Marcelo Camargo/Agência Brasil

Roberto Campos Neto — Foto: Marcelo Camargo/Agência Brasil

The most ambitious project on the agenda for competitiveness and financial inclusion of the Central Bank (BC), the digital real will enter the testing phase in the next few days, with a prototype of what will be the tokenized version of the Brazilian currency. The project will require the creation of a new payment system that will be integrated with the current financial clearing mechanisms. The details of the new technology, which will allow money programming and even connect vehicles and home appliances to the financial system, is expected to be known on Monday during the presentation of studies by the project coordinators. The forecast is that the digital version of the Brazilian currency will reach the public by the end of 2024, still under the management of Roberto Campos Neto, an enthusiast of the idea.

The speed of transactions, high scale, cost of fractions of a cent, ease, and security of integration with other digital technology ecosystems will depend essentially on the technology chosen, given that some older networks have technical limitations and difficulties in being updated. The Central Bank can choose to contract an external technology or develop everything “in-house.” The goal, according to Mr. Campos Neto, is to promote new businesses and possibly place Brazil at the forefront of the tokenized economy, as few countries are as advanced in this area and have regulatory frameworks in place.

“The combination of all this will determine how accessible the technology will be. To encourage innovation and competition the technology needs to be cheap, fast, and easy to integrate — Which at the end of the day will help with financial inclusion goals,” said Roberto Durscki, director of partnerships at Stellar, an open blockchain that tracks digital currency studies in several countries.

Due to legal restrictions on privacy and security issues, the Central Bank will issue the digital real within a private blockchain of the permissioned type – that is, restricted to banks and supervised payment institutions. The main inspiration is Ethereum, the crypto-active ecosystem that innovated by allowing the creation of smart contracts that gave rise to several applications of decentralized finance (DeFi), such as person-to-person lending, fractionalization and transfer of assets that allow financing ventures outside the capital markets, as well as 24-hour operation, among other advantages – it turns out that Ethereum has public access, open source code, and is slow and expensive.

One of the options would be a network like Hyperledger Besu, which is an Ethereum client that works in a participant-restricted way but is fast, cheap, and compatible with the DeFi world.

Another alternative is the R3 Corda system, which is not a blockchain but a similar distributed ledger technology (DLT). The advantage is that it was designed only in 2016 by a consortium of more than 200 banks to serve the financial market. On the other hand, it is far removed from the world of decentralized finance, making it difficult to ambitiously bring in “entrants” that challenge the status quo of traditional finance.

“Corda is a DLT with a bank smell, a bank face, a bank taste, and funded by banks,” said the developer JC Bombardelli, a professor at Gama Academy.

After the technology, the main issue is distribution. In Brazil, CBDC – the name of the BCs’ cryptocurrencies – itself is expected to be limited to the wholesale operations of large banks, which will have sovereign risk and the guarantee of the monetary authority. The current digital money will be a tokenized deposit that functions like a stablecoin issued by banks – that is, with the banking institution risk and compensation from the Credit Guarantee Fund in the event of a breach.

This path is different from China, where citizens have CBDC in their digital wallets, guaranteed by the People’s Bank of China (PBoC). The legal and operational implications are relevant because they include, for example, the custody of the keys to the coins in the digital wallets, which the Brazilian Central Bank considers too complex to leave under the responsibility of the individual consumer.

In the Brazilian design of tokenized deposits, the management should be left to the banks, which can be held responsible in case of hacking into digital currencies. In China, the wallet and the keys belong to the citizen, and it is up to them to have the best technology to ensure security. Smartphone manufacturers such as Huawei are developing digital wallets attached to mobile phones. The definitions will set the guidelines for infrastructure and technology providers to position themselves in the new service chain.

Central bank digital currencies are seen as having the potential to reduce the appeal of cryptocurrencies by bringing fiat currency technology up to date and allowing transactions to take place in a controlled and secure environment. The new arrangement should foster an entire chain of financial services and market infrastructure with even more competitive and affordable costs for consumers and businesses than fintech and the Central Bank’s instant-payment system Pix itself have brought to the financial system.

To design the architecture of the digital real, the Central Bank invited the main players in the sector to test operations involving tokens at Lift (Laboratory of Financial and Technological Innovations). Since the digital real does not exist yet, each participant used its token to simulate the transaction.

The lab tested applications ranging from delivery versus payment (DvP) applications, such as the transfer of vehicles and real estate by payment developed by Santander, to international transfers – payment versus payment (PvP) – between Brazil and Colombia, developed by Itaú.

The fintech Aave simulated loans from funds collected from multiple savers, and Mercado Bitcoin showed that it is possible to use the digital real to buy tokens traded on open networks such as Stellar, opening the way for the digital real to reach the decentralized applications of crypto assets. In both cases, the tests were not only technological but also how the digital real would work within the secrecy and security rules in force in the country. Even offline payments, which are taboo in instant transfers, were simulated.

For Fulvio Xavier, in charge of special projects at Mercado Bitcoin, the Central Bank may invite all industry participants to contribute to the design of the new technology. “The permissioned network needs other nodes, and the infrastructure needs to be shared to work.”

“Our entire network is built on the assumption that there will be multiple financial institutions, each operating on its blockchain and therefore will have the need to interoperate with each other,” said Alex Alex Buelau, co-founder and CTO of Parfin, a provider of marketplace infrastructure for digital assets.

“Digital currencies will enable instant payments and reduce the number of intermediaries in the process, lowering the cost of financial transactions. The future of the global economy depends on the CBDC’s development,” he said.

*Por Toni Sciarretta — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Central Bank has to see Haddad’s tax package to believe

There are signs that policymakers are divided, with one side more willing to give the new administration the benefit of the doubt, while the other seems to have a more skeptical view

07/02/2023

Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

The Central Bank’s Monetary Policy Committee (Copom) has to see the implementation of the fiscal package unveiled by Finance Minister Fernando Haddad to believe that it will reduce the primary deficit and ease inflation control.

There are signs that the policymakers are divided, with one side more willing to give the new administration the benefit of the doubt, while a more fiscally conservative side seems to have a more skeptical view.

In the minutes released Tuesday, some Copom members say the financial market is projecting a lower primary deficit than the one foreseen in the 2023 budget. But the document says that when it comes to calculating the impact of fiscal policy on inflation, the committee as a whole worked with the official figures approved by law, maintaining its standard methodology of analysis.

This makes a difference in the central bank’s projections. Presumably, if the Copom gave the same vote of confidence as the financial market, forecasting a smaller primary deficit in 2023, inflation could be lower and the room for an earlier interest rate cut would be greater.

According to the Focus bulletin, the financial market is forecasting a primary deficit of 1.11% of GDP in 2023, while the negative result forecast in the budget would be equivalent to 2.2% of GDP.

For now, the Copom as a whole maintains the larger deficit in its accounts, acknowledging only that the implementation of Mr. Haddad’s fiscal package would weaken the fiscal stimulus to demand and “could reduce the upside inflation risk.”

At its meeting last week, the Copom revised its inflation figures, taking into account two things. On the one hand, the sharp rise in future interest rates, which occurred precisely because of the worsening fiscal risk, should theoretically contribute to reducing activity and, consequently, inflation. On the other hand, it was considered a permission to spend about R$200 billion in the budget, which increases aggregate demand.

According to the Central Bank’s calculations, one factor ends up canceling out the other when evaluating the inflationary effects transmitted through aggregate demand. These calculations, it should be noted, do not take into account Mr. Haddad’s package, which relies mainly on increased tax collection.

Aggregate demand is, of course, only one of the channels through which fiscal policy affects inflation and, consequently, the conduct of fiscal policy. It can also affect inflation expectations, asset prices such as the foreign exchange rate, and the neutral rate of interest.

But it is an important barometer of the debate within the committee on how fiscal policy affects inflation. It is worth noting that there is a wing within the Copom that has tried to see the fiscal policy glass half full rather than half empty in the debates.

According to the Copom minutes, “some members” noted that the market was expecting a lower primary deficit than included in the budget. “Some members noted that the implementation of the Ministry of Finance fiscal package should mitigate the fiscal risk and consider that it will be important to monitor the challenges for its implementation,” the minutes say.

The Copom talks about “some members” when at least three policymakers have a different view from the majority. In theory, this could be three or four members of the nine-member committee.

But there is a more fiscalist wing that is worried about the inflationary impact of Mr. Haddad’s fiscal policy. It is also more evident in the discussions about the neutral rate of interest. Today, the Central Bank uses a neutral rate of 4% in its models, but some members have said it could be higher.

“Some members evaluated the possibility of incorporating some increase in the neutral interest rate, towards the movement observed in longer-term inflation expectations extracted from the Focus survey,” the Copom minutes said. This would result in a neutral rate of around 5% per year in real terms, given the expectation of an interest rate of 8.5% in 2026 and an inflation rate of 3.5%.

“The Committee chose, at this point, to maintain the neutral interest rate at 4%, but evaluated alternative scenarios and identified that the impacts on its projections of an increase in the neutral rate grow over time and become more relevant as of the second half of 2024,” the minutes said.

Again, the thesis of a more conservative neutral rate came from a minority of three or four Copom members. This is the fiscalist and more conservative wing.

Thus, to know the chances of an earlier interest rate cut or a tighter monetary policy, it will be necessary to follow the data on the implementation of Mr. Haddad’s fiscal policy and the officialization of a lower primary result target in the law, probably the new fiscal rule that is being designed.

It will also be necessary to follow the evolution of the two wings of Copom, composed of a more moderate and a more conservative one. Not only the current members, but also the new ones that will be chosen this year for the Central Bank’s board, two of them in February.

*By Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Central Bank is confident that high interest rates are working

Question mark is whether the fiscal policy will not get in the way


12/15/2022

The Central Bank remains confident that the high interest rates are being transmitted to economic activity and will have the desired effect to lower inflation. Obviously, the question is whether the fiscal policy will not get in the way.

The Central Bank’s Inflation Report released Thursday tries to argue that unlike what many analysts believe, there is economic slack, which is having an effect on prices.

In this study, the Central Bank divides the prices of services into two groups. One includes those that are more inertial, that is, prices that rise because of past inflation. The other includes prices linked to the economic cycle, which rise less when there is economic slack.

The results presented by the Central Bank show that prices of services linked to the cycle are lower and falling at the margin. This would be a sign that, in fact, there is economic slack.

This slack is estimated by the Central Bank at 0.8% for the third quarter of this year. The monetary authority said that this slack tends to grow further because the monetary tightening will be felt more strongly by the economy. At the end of this year, the economic slack will probably be at 1.1% and reach an even higher level at the end of next year, at 1.8%.

The Central Bank has revised its estimate of slack, which was a little higher. But this revision is due to the fact that the GDP was revised, and economic growth was higher than expected. This means lower slack, but nothing changes the qualitative assessment that there is slack.

The Central Bank’s estimate of economic slack is much higher than that estimated by the financial market, which sees the economy operating at total capacity in the third quarter of this year (technically an output gap of 0.1%) and an economic slack of 0.7% at the end of next year.

Some economic analysts have questioned the Central Bank, arguing that there is an analytical flaw. Inertial service inflation depends on different variables than cyclical service inflation. Thus, it would be incorrect to say that there is economic slack just because one is below the other.

Diogo Guillen — Foto: Silvia Zamboni/Valor

Diogo Guillen — Foto: Silvia Zamboni/Valor

Confronted with this question, the Central Bank’s director of economic policy, Diogo Guillen, explained that this part of the report illustrates what a set of models used by the Central Bank, which points to the existence of economic slack, says. In this part, in the most recent data, the inflation of services linked to the cycle is receding.

In the section of the Inflation Report where the Central Bank analyzes short-term inflation, there is also some of the monetary authority’s view on the effect of economic slack on inflation.

The monthly readings came higher than expected, partly due to fresh food inflation. But they were not so high thanks to services. “Services inflation was significantly lower than expected, with emphasis on the more favorable dynamics of its underlying component.”

Mr. Guillen has argued precisely that one should look at inflation to identify the effect of economic slack. In fact, the economic slack is calculated in order to know what is going to happen to inflation.

In short, the Central Bank’s report shows that it sees monetary policy working as expected, confirming a scenario in which inflation falls toward the target. Uncertainty about the next administration’s fiscal policy is one thing that may get in the way.

All the noise surrounding the public accounts since President-elect Luiz Inácio Lula da Silva’s victory in the elections has already started to enter Central Bank’s scenario, albeit incipiently.

The Central Bank’s inflation projections have been somewhat stable in recent months, indicating a price hike of 3.3% in mid-2024, basically in line with the targets. But within this stability, some factors accelerate inflation, while others slow it down. In the end, they cancel each other out.

The inflation report lists factors that, since September, have acted in the direction of raising the inflation projection: the short-term inflation surprise and a lower economic slack than previously estimated.

But some forces reduce the inflation estimate. Among them is the fact that the market expects interest rates to start falling only in August, not in June as previously estimated. There is also the fact that the level of economic uncertainty is higher.

These two facts are linked to fiscal uncertainty, which makes the monetary tightening and financial conditions more severe than expected, pushing the economy into a downward spiral.

*By Alex Ribeiro — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Central Bank indicates greater concern over Lula’s fiscal policy

In face of fiscal risks, Copom maintains key interest rate Selic at 13.75%

12/08/2022

Central Bank's building in Brasília — Foto: Reprodução/Facebook

Central Bank’s building in Brasília — Foto: Reprodução/Facebook

Central Bank’s Monetary Policy Committee (Copom) kept intact the key interest rate Selic at 13.75% per year and its monetary policy message that foresees the maintenance of the rate at high levels for a sufficiently prolonged period.

Nevertheless, it intensified the tightening a little bit, by confirming at least a part of the financial market’s expectations that the current interest rate level in the country should be higher, due to fiscal uncertainties brought by President-elect Luiz Inácio Lula da Silva’s fiscal policy.

On Wednesday, the Copom found in its models an inflation rate of 3.3% for the 12-month period through June 2023. The percentage did not change much from the previous meeting’s estimate of 3.2% in October.

But this time the Central Bank uses in its projection a slightly higher interest rate path in the second half of 2023. In October, the assumption was that interest rates would start to fall in June, reaching 11.25% a year by the end of next year.

Now, the assumption is that interest rates will only fall in August, ending 2023 at 11.75% per year. That is, over the second half of 2023, the interest rates used in the projection are about 50 basis points higher.

The Central Bank uses, in its models, the trajectory for the Selic rate forecast by the market. Since all the fiscal uncertainty began with the strong break of the spending cap, economic analysts started to forecast slightly higher interest rates.

On Wednesday, with its projection, the Central Bank sent a message: the analysts are right in putting a little more interest rates on the Focus, the Central Bank’s weekly survey with analysts. If the interest rate cut were to start in June 2023, as previously expected, the projected inflation would probably be a bit higher, and further away from the target. The Copom is targeting an inflation rate of 3.125% for the 12-month period through June 2023, considering an average between the goals set for next year (3.25%) and the following year (3%).

For the time being, the Copom has confirmed only a little of the additional dose of interest rates that the market has incorporated. It has not gone as far as to legitimate all the huge risk premiums that are in the interest rate curve traded in the market, which has suffered a strong increase.

But, in a way, this upswing in market interest rates is entering into the Central Bank’s estimates, as it causes a strong deterioration in financial conditions.

This more hostile environment throws the economy down and widens the economic slack somewhat. But it does not necessarily slows down inflation, because the effect of fiscal uncertainty may prove to be stronger.

At the same time that it is incorporating some of the damage caused by fiscal uncertainty, the Copom is trying to maintain a degree of serenity, apparently so as not to worsen a picture that is complicated enough.

The Copom raised its inflation projection, but not too much, so as not to corroborate stronger interest rate hikes. Also, it stopped short from saying that its balance of risks for inflation has become asymmetric, tilting to the negative side, which could also require an even higher Selic rate.

The Copom sent the message that depending on how fiscal policy evolves, it may have to act. It referred to the “high” uncertainty in its balance of risks. And, although it preached serenity in the evaluation of fiscal policy, it said it will closely monitor how it will affect the foreign exchange rate and inflation expectations going forward.

*By Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Central Bank keeps key interest rate at 13.75% per year

Decision was in line with median of market expectations and signaled in the previous meeting

10/27/2022

Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

The Central Bank’s Monetary Policy Committee (Copom) decided to maintain the key interest rate Selic at 13.75% per year on Wednesday, as signaled at the previous meeting in September. The decision was unanimous.

The decision was in line with the median of market expectations. According to a survey conducted by Valor, all 108 financial institutions consulted expected the interest rate to remain at 13.75% per year.

In the statement released on Wednesday, the Copom said the decision reflects uncertainty surrounding its scenarios and balance of risks with even greater than usual variance. The committee states that the decision is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy.

The Copom also states it will remain vigilant, assessing if the strategy of maintaining the Selic rate for a sufficiently long period will be enough to ensure the convergence of inflation

At the September meeting, the Central Bank had already stated that it would remain vigilant, “assessing if the strategy of maintaining the Selic rate for a sufficiently long period will be enough to ensure the convergence of inflation.”

Throughout the cycle, which began in March 2021, the monetary authority raised the Selic rate by 11.75 percentage points, for 12 consecutive times, in the face of a scenario of high and persistent inflation. The Copom will meet again on December 6 and 7.

*By Larissa Garcia, Alex Ribeiro — Rio de Janeiro, São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Central Bank reinforces cautious tone about inflation

In private meetings with investors in Washington, policymakers emphasized commitment to goals

10/17/2022

Banco Central

With the monetary tightening cycle over and the Selic benchmark interest rate at 13.75%, the Central Bank tried to demonstrate a vigilant attitude with the conduct of monetary policy in private meetings between directors and investors in Washington, in the scope of the meetings of the International Monetary Fund (IMF) and the World Bank.

Market participants heard by Valor on condition of anonymity emphasize the cautious tone of the Brazilian monetary authority and the emphasis given to the willingness to bring inflation back to the target.

Roberto Campos Neto, Central Bank’s president, took part in two meetings closed to the press on Friday and tried to reinforce his commitment to make inflation converge back to the targets. In one of the meetings, he reportedly said twice that he wanted to convey the message of serious commitment to the target, besides being concerned, in particular, with the dynamics of services inflation.

Mr. Campos Neto’s statements come in the wake of movements in the interest rate market that point to the possibility of the Selic rate cuts cycle starting as early as March 2023. He also stated, in one of the meetings, that the Central Bank’s job is to bring inflation back to the target and that the monetary authority will do whatever is necessary for this to happen.

Mr. Campos Neto was even questioned in one of the events about the behavior of inflation expectations and about when the cycle of Selic cuts might start. And, when analyzing the market’s behavior, the president of the Central Bank stated that part of the expectations of interest rate cuts embedded in the curve are more related to technical positioning and the probabilities of the scenario ahead.

Thus, according to one of the participants, Campos pointed out that the yield curve does not necessarily place reductions in the Selic faster than the Focus.

Thus, according to one of the participants, Mr. Campos Neto pointed out that the yield curve does not necessarily place cuts in the Selic rate faster than Focus, Central Bank’s weekly survey with economists.

In the Focus published last week, the median expectation of market economists is that the cycle of Selic cuts will start in June 2023, when the relevant horizon for the conduct of monetary policy will already be fully in 2024. A market professional present at one of the meetings even pointed out the perception that the Focus scenario, with the start of the easing cycle in June, still seems to be the most adequate for the Central Bank, at least for the moment.

Mr. Campos Neto was also questioned about the Brazilian fiscal situation and, in the perception of market participants, adopted a slightly more optimistic tone with the public accounts, although he emphasized the uncertainty in the scenario. “He noted that the data are coming in very good and better than expected, but also said that there is a degree of uncertainty in the future,” said one of those present.

This same source observes that Mr. Campos Neto, in his presentation, compared fiscal measures that have been implemented to contain the surge in energy commodity prices and noted that the measures adopted in Brazil are below the actions of other countries. “This set a tone of less concern about fiscal policy. It seems that the caution in this area is more in the long term, in the fiscal framework,” said the source.

Also present in Washington, Fernanda Guardado, Central Bank’s director of international affairs and corporate risk management, took part in a private meeting with investors, in which she used a more cautious tone when talking about the fiscal uncertainties ahead.

Ms. Guardado also maintained a more concerned tone when speaking about fighting inflationary pressures. According to market players, she was attentive to the existing uncertainties in the labor market and the degree of economic slack. A person who was present at the meeting stated that Ms. Guardado was in a more cautious position in relation to unobservable factors, such as the output gap (a measure of the economy’s slack), given that there were significant revisions in the economic scenario, which started to show a more closed gap.

In the September meeting of the Monetary Policy Committee (Copom), Ms. Guardado was one of the dissenting votes, defending an additional 25 basis points increase in the Selic, to 14%. The majority of the committee, however, voted to maintain the key interest rate at 13.75% at the meeting.

The only event open to the press in Washington with the presence of Roberto Campos Neto took place on Saturday, at a Group of 30 (G30) seminar. During his participation, he observed that the domestic interest market has begun to price the beginning of a cycle of Selic cuts in March 2023 and stated that this could mean “that the markets understand that we have done our job”.

Mr. Campos Neto also pointed out that Brazil has had three consecutive months of deflation. “A lot of that was because of government measures, so we don’t think it’s a special reason to celebrate. But the dynamic is improving,” he stated in the opening of his panel at the event.

*By Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Independent Central Bank likely to see growing dissidence

Monetary authority has said divergence does not mean signaling of monetary policy by committee as a whole

09/22/2022

Central Bank President Roberto Campos Neto — Foto: Billy Boss/Câmara dos Deputados

Central Bank President Roberto Campos Neto — Foto: Billy Boss/Câmara dos Deputados

Dissenting votes in the Central Bank’s Monetary Policy Committee (Copom), such as the ones seen in Wednesday’s meeting, are bound to become more frequent from now on with the independence of the monetary authority, and should no longer be such a rare event.

Since 2016, under Alexandre Tombini, the Central Bank has not recorded dissenting votes. On Wednesday, directors Fernanda Guardado (International Affairs) and Renato Gomes (Organization) wanted to raise interest rates by 25 basis points, while the majority decided to maintain Brazil’s key interest rate Selic at 13.75% per year.

But this does not mean that, previously, there were no divergences among its members. They occurred especially in the most critical periods, as the beginning and the end of the monetary tightening cycle. But they were not expressed in the votes.

An important point: the Central Bank has said that divergence of views and votes does not mean signaling of monetary policy by the committee as a whole. They simply show that policymakers have different opinions. It is important to know these views in order to analyze if one argument or another gains strength in the committee.

In January 2021, for example, at least three members of the Copom defended, in the discussions that took place in that meeting, that the committee should immediately start a cycle of interest rate hikes – the key rate was then at 2% per year. The majority won, but in the following meeting, the interest rates went up, even more than expected by the market.

There was also divergence in the mid-2020s when the Copom discussed how far it could take the key rate down in response to the Coronavirus pandemic. Most directors argued that the room for interest rate cuts was more limited because an emerging economy could not live with interest rates as low as developed countries without increasing risks to financial stability. At least three Copom members thought that interest rates could be lowered further.

There may have been other critical moments of divergence in meetings that were not made explicit in the Copom statements. There were strong rumors in the market, for example, that policymakers diverged in late 2021, when the committee maintained the pace of monetary tightening at 150 basis points.

There are several possible explanations for the lack of divergence in the committee votes. It may be just that its composition has been more homogeneous. It could also be the style of the last presidents – Ilan Goldfajn and the current one, Roberto Campos Neto – in the search for consensus in the decision, despite divergences in the debates.

But it may also be a governance defect of our Central Bank, in which the president had more powers than the other members. Until the independence of the Central Bank, the president of the monetary authority was the one who indicated the other members of the collegiate board to the president of the Republic. So there was a certain hierarchy, with a president of the Central Bank who, at any time, could fire the directors.

The independence of the Central Bank changes this situation, because policymakers have fixed terms of office, regardless of the president of the Republic and the president of the monetary authority.

Today, the Central Bank’s board has greater cohesion because all members were chosen by the current president, Mr. Campos Neto. But in February 2023, the terms of two Copom members, including the monetary policy director, Bruno Serra, will end. In December 2023, two more terms will expire.

The new members will be nominated by the president of the Republic to be elected in October, and in theory may have a less homogeneous vision, when compared to the current team. This increases the chances not only of dissident votes but also of public remarks from members with different views.

This is an additional argument for not seeing dissenting votes as monetary policy hints. They are, in fact, an indication of the committee members’ leaning to one side or the other in the execution of monetary policy, as is the case in other central banks, such as the U.S. Federal Reserve.

*By Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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