RIO DE JANEIRO, BRAZIL – The inflation target is the Central Bank’s mission and will be met, said on Tuesday the institution’s president Roberto Campos Neto, adding that the monetary policy’s “partial normalization” statement adopted by the Central Bank may be altered in case of a change in scenario.
“We are saying that with the tools we have today, the modeling we have, the correct thing to do would be to begin using the partial language sooner. If at some point it is perceived that it needs to be different, the partial language will no longer be used and we will head towards neutral (interest). What will make this happen? A change in scenario,” said Campos Neto during an online event at BTG Pactual bank.
He pointed out that the moment is one of great uncertainty, with doubts surrounding the trajectory of commodity prices and also services inflation at a time when economies are reopening. In the case of commodities, he pointed out that the price of corn has dropped after peaking and that the prices of soy in Brazilian reais and oil have been at a standstill “for some time.”
“It is important to stress that our inflation target is going to be met, that is the central bank’s mission. So we have done more than the market previously expected and we will continue on this path,” added the Central Bank president.
The Central Bank raised the basic interest rate twice, by 0.75 percentage points since March and has announced its intention to further tighten it by the same magnitude in June. The Central Bank reported that the high cycle aims at a partial normalization of the interest rate policy, i.e., the intention would be to maintain the SELIC still in stimulative territory, below the level considered neutral (which is currently around 6.5%, according to the Central Bank). The basic interest rate currently stands at 3.5%.
Given the strong current inflationary pressures and the increase in inflation expectations for next year, many economists have argued that monetary tightening should target the end of stimulus to activity.
In defense of the Central Bank’s action, stressing that the institution has made it clear that its projections show that further tightening would lead to inflation below the target, Campos Neto said that a more transparent strategy of communicating with the market sometimes generates noise, but that the intention is not to back down.
“Sometimes the noise caused by transparency is solved with more transparency, not less,” he said, adding that international experience shows that countries that went back on their transparency strategy were ultimately hindering “this channel in the power of monetary policy.”