Brazil’s Central Bank will do whatever necessary to reach inflation target, says its president

RIO DE JANEIRO, BRAZIL – The president of the Central Bank, Roberto Campos Neto, stressed that the autarky “will do whatever is necessary to achieve the inflation target.” “We have the tools, we can do the work. We communicate with the market. With more transparency in the use of our instruments.”

Campos Neto acknowledged that there had been more surprises in inflation in recent months, with shocks spreading and higher-than-expected prices for services in the IPCA – the official inflation index – in July.

He also noted that inflation expectations for 2021 are severely dampened by shocks this year in food, energy, and now the drought.

“People have started to adjust expectations upward for 2022. We mention in our communication the different expectations of some market participants and our model. It’s important to communicate that transparently, focusing on what we’re doing and the logic behind it. We look at our baseline scenario, the balance of risks, and interpret the data.”

INTERNAL NOISE

The central bank president assessed that international uncertainties are greater but acknowledged that internal noise had had a major impact on the rise in market expectations for inflation in 2022.

“The noise of the institutional part of the Brazilian business world, the struggle between the government branches, has increased. Lately, there is another dimension to this noise, related to new projects that the government has presented to Congress, such as the new Bolsa Família, which the market has linked to next year’s elections,” he said.

Once the government explains how the new social program – Auxílio Brasil – will work and how it will be paid for, this uncertainty in the market should diminish, Campos Neto believes.

“Once the government clarifies that the new social program does not violate the Fiscal Responsibility Law, everything will become clear. I understand the noise that is being created, and I understand that the government needs to send a very responsible message about where the fiscal path will go from here,” he added.

The BC president stressed that it is important to understand how the new payments will affect inflation at this point in time and over time.

“A few months ago, we were talking about a debt-to-GDP ratio of 94%, 95% to 100%. Now we’re talking about the debt to GDP ratio being closer to 80%, so at a much better level. And from a budget deficit of 1.7% of GDP this year, we will have something between zero and 0.5% in 2022, which is also much better. And even then, the fiscal noise prevails,” he added.