Bruno Serra — Foto: Carol Carquejeiro/Valor

Bruno Serra Fernandes, the Central Bank’s director of monetary policy, said Wednesday that the outlook is becoming more positive for inflation, but does not yet allow one to glimpse the beginning of the reversal of the monetary tightening cycle. According to him, the cycle seems to be coming to an end, but decisions depend on the trajectory of data.

“Looking ahead, I think we start to have more positive inflation, hopefully before the peers. But thinking about easing monetary policy is a step that lies ahead. We first need to see the effect of what we have done,” he said at an event in São Paulo.

Mr. Serra added that the cycle seems to be coming to an end, but that if reality imposes a more negative scenario, the monetary authority may extend it a little further.

This month, the Central Bank raised the Selic, Brazil’s benchmark interest rate, by 100 basis points, to 12.75% per year, and said that it sees “as probable” a new, smaller hike in June. In the minutes of the meeting that raised the rate, the directors reinforced their bet on the lagged effects of monetary policy to bring inflation and expectations to the target in 2023.

Financial market analysts see chances of the Central Bank adopting the strategy of high interest rates for a long time to combat the most recent inflationary pressures, instead of taking the Selic much higher than the current level. On Monday, Mr. Serra said that the Central Bank tries to avoid rate fluctuations, although it doesn’t always succeed.

On Wednesday, the director stressed that the effects of the interest rate hike are not yet fully tangible. He recalled that the tightening cycle was made in an intense and fast way, but that, until the second half of last year, the monetary policy was still stimulating the economy. And he said again that from the second half onwards the effects of the tightening will be clearer, here and abroad.

Mr. Serra emphasized the challenging international backdrop but said that he believes that central banks are working and equipped to bring inflation back to the target. For him, the U.S. Federal Reserve and other developed country central banks have “gotten into the game” to deal with global surplus demand.

Mr. Serra stressed that to conduct local monetary policy, it is key that global inflation moves toward about 2%, and that above that it is possible that the models will not work as well. He added, however, that he believes that the central banks are pursuing their targets.

Asked about fiscal pressures in the country, especially in an election year, he said that at the moment the spending cap, the rule that limits growth in public spending to the previous year’s inflation, is being attacked from “all sides” but that, from November on, it will be necessary to make clear the existence of an instrument that indicates the country’s fiscal direction.

“Right now, many people are attacking the cap, but I think that soon it will become clear that, whether it is the cap or something slightly different, we will need some fiscal target that addresses the situation, that reduces the fiscal uncertainty that weighs on asset prices,” he said.

Source: Valor International

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