Brazil’s Central Bank president: “Fed decision has little bearing on what Brazil will do”

RIO DE JANEIRO, BRAZIL – Central Bank President Roberto Campos Neto on Thursday said in a press conference on the Quarterly Inflation Report (RTI) that the change in the Federal Reserve’s monetary policy positioning will not greatly affect the Brazilian institution’s strategy.

Campos Neto recalled that some Central Banks assumed that inflation was a transitory issue, with supply-linked causes, but argued that the figures do not corroborate this, as defended a few months ago. “The Fed has been assuming that inflation is more persistent and with a demand component.”

He pointed out that, after the Fed’s decision on Wednesday, the priced hikes in the American yield curve were anticipated, but assessed that the market’s reaction was relatively benign.

“The Central Bank came out ahead, made an adjustment in rates, very aware that some of the inflation was more persistent. So I don’t think it changes much in terms of what we’re going to do. But it depends on how coordinated the interest rate adjustment in the world will be. What’s important is if we will have an organized or unorganized adjustment in fixed income and what it means for flows to emerging markets and to Brazil.”

Campos Neto also said that, according to the Central Bank, the recent increase in the risk premium is partly related to short-term fiscal issues, but also to a market perception of lower structural growth, which has implications for the trajectory of public accounts.

FISCAL SITUATION

The president of the Central Bank also clarified that the Monetary Policy Committee’s (COPOM) base scenario does not consider news that would worsen the perception of the fiscal situation.

“The main scenario we see is a continued improvement in the pandemic, a stable level of uncertainty, with some improvement, but at a very high level, and the absence of issues that could worsen the fiscal situation. We understand that the page has been turned on the fiscal side, with what has been approved.”

Asked if the Central Bank was “isolated,” Campos Neto said that it is not about the Central Bank being alone or not and that the agency does not analyze or criticize fiscal policy, nor does it make projections.

“What matters is what the agents understand and how it impacts the macroeconomic scenario. We understand that there is a need for a program to tackle the pandemic and to equate expenses with the amount of resources. We understand that the validity of the existing framework was challenged,” he said, repeating that the market’s perception is that there was disarray in the framework.

Campos Neto also stated that the Central Bank understands that part of the fiscal improvement will spread to the coming years.

INERTIA

The president of the Central Bank said that the monetary authority continues to “investigate” the inertia of service inflation. “We are looking at the differentiation between industrial and services inflation. In the last inflationary crisis, the services part was much higher and the industrial price part was much lower,” he said.

Central Bank Economic Policy Director Fabio Kanczuk added that the Central Bank’s exercises suggest that inertia has eased somewhat with the pandemic. “But we are still using as our basis the same inertia as in the past,” he added.

PROJECTIONS AND TARGET

Kanczuk stressed that, considering the balance of risks, inflation for 2022 is above the target, which requires a longer period of higher interest rates. “The data for this terminal rate is deliberately not disclosed.”

In the basic scenario, the Central Bank estimates that the IPCA – the official inflation index – will close 2022 at 4.7%, but the asymmetry caused by fiscal challenges leads the Committee to expect the index to be above the target. The ceiling of next year’s target is 5.0%.

Kanczuk also added that, although the projection for 2024 inflation is below the target (at 2.6%, against the central target of 3.0%), that year is not on COPOM’s relevant horizon, which includes 2022 and 2023 with equal weight.

The Economic Policy director also said that the COPOM is concerned and looking at the risk of long-term de-anchoring and that there is no conflict in reaching the target on the relevant horizon.