Uncertainties led to monetary tightening, Central Bank director says

Mr. David spoke at an event hosted by UBS BB in Washington, D.C. The Selic benchmark rate currently stands at 15% per year.

“The Central Bank decided [in July, when it halted the tightening cycle] that it had already accumulated enough rate hikes to place us at a more restrictive level of interest rates and monetary conditions than would be prescribed under normal circumstances,” he said. “Why set the Selic at 15% and keep it there? Because inflation expectations were unanchored, and because there are many more layers of uncertainty in this cycle than in past ones.”

According to Mr. David, these “tighter conditions” in monetary policy require a “microscopic look” at all sets of data. Only then, he said, will it be possible to assess whether the Central Bank’s stance remains appropriate and whether inflation is effectively converging toward the target.

“This is the phase we’re in now. We believe we need to stay at this level for a fairly prolonged period until we’re convinced that the data are converging toward where we believe they should be,” he said.

In public remarks, Mr. David has repeatedly stressed the need for a tighter monetary stance than would be necessary if inflation expectations were anchored, and for a longer period than would be warranted in a less uncertain environment.

At its most recent meeting, when it kept the benchmark rate at 15% per year, the Monetary Policy Committee (COPOM) said it would remain “vigilant” and assess whether holding the rate at this level for a “prolonged period” will be enough to bring inflation back to target. The 12-month Extended National Consumer Price Index (IPCA) through September stood at 5.17%, compared to the 3% target, with a tolerance band of 1.5 percentage points above or below.

The Central Bank director underscored the importance of analyzing the full range of data during this extended period, “because the lagged effects are different in each sector” of the economy. “The data we’ve seen so far are consistent with what we’ve planned up to this point,” said Mr. David, who is in the United States to attend International Monetary Fund meetings.

He also noted that inflation expectations captured by the Central Bank’s Focus survey rose last year but have since fallen “consistently,” though they remain well above the 3% target. “Even if I’d hoped they would be moving faster than they are, they are moving in our direction and are likely converging toward what we believe will help bring inflation to target,” he said.