Brazilian Central Bank: Future of interest rates will depend on war and other shocks

RIO DE JANEIRO, BRAZIL – The future of interest rates in Brazil will depend on the extent of the effects of the war between Russia and Ukraine and other possible shocks on inflation, the president of the Brazilian Central Bank (BC), Roberto Campos Neto, said on April 7. In an event promoted by an investment company, he stated that the conflict in Eastern Europe brought an additional challenge to monetary policy.

“Looking at the long end of the curve and the longer inflation expectations, there is a certain consensus that we are on the right track. The calibration always depends on the extent of the shock. We have talked a lot about this in the last Copom [Monetary Policy Committee] meetings,” he said.

According to Campos Neto, even if the war ends in the short term, the planet will continue to face challenges for a long time. He cited the re-division of global value chains, a problem that has persisted since the covid-19 pandemic, and the schism between democratic countries with other regimes.

In the last Copom meeting, the Central Bank had announced that it would raise the Selic rate (the economy’s basic interest rate) by one percentage point in the May meeting to 12.75% a year. However, Campos Neto has said that the authority could promote an additional increase in June if the international shocks – external factors that pressure inflation – continue.

Campos Neto said that inflation is “detaching a lot” from the target, with great dissemination among the items whose prices are rising. He pointed out that core inflation (a measure that excludes the most volatile components) is also on the rise, indicating the persistence of the price indexes.

“We have been concerned about being proactive about this, to message that the Central Bank has the instruments to act,” he said.

ENERGY

Despite recognizing that inflation cores continue high, the president of the Central Bank said that they are “a little more behaved”. However, he said that recent events would reduce the pressure on prices, such as the end of the tariff flags on electricity bills, announced on April 6 by President Jair Bolsonaro after improving the level of hydroelectric plants reservoirs.

For Campos Neto, the main problem should be the global inflationary pressure in the coming months. He recalled that the United States had recorded the highest inflation in 40 years, with the U.S. consumer price index at around 8% over 12 months and core inflation at about 6.5%.

EXCHANGE RATE

About the recent appreciation of the Real, the BC’s president said that the dollar’s fall in Brazil was influenced by the rapid rise in interest rates in recent months, the improvement in tax collection in the short term, and the increase in the international price of commodities (primary goods with an international quotation). He also mentioned the increase in investments by foreign companies in Brazil.

Concerning the elections, Campos Neto said that, despite the uncertainties, the limitations imposed by the electoral legislation and by the Fiscal Responsibility Law would cause public spending to be more or less controlled. “Because it is an election year, we enter a phase where nothing else can be executed. The electoral law does not allow this. The short-term fiscal is more or less predetermined,” he explained.

According to the president of the Central Bank, the market’s estimate for the growth of the economy may be revised upwards. According to the Focus bulletin, a weekly BC survey, the financial institutions forecast a 0.5% expansion of the Gross Domestic Product (GDP, the sum of the wealth produced in the country) in 2022. In the last Inflation Report, released at the end of March, the monetary authority projected growth of 1%.

STRIKE

Campos Neto also commented on the strike of Central Bank employees. He said he expects a quick solution to the movement, so that paralyzed projects can be resumed. “We now have the strike issue, which we hope to address soon. We need to move forward with these projects. They are important projects for society,” he declared.

On strike for an indefinite period since April 1, the Central Bank’s employees are demanding a 26.3% readjustment and career restructuring. The meeting on April 5 between the strikers and the Ministry of Economy representatives ended without agreement.

With information from Agência Brasil