Brazil’s Central Bank president: “We have autonomy and will act to control inflation”

RIO DE JANEIRO, BRAZIL – The Central Bank has autonomy and will act independently with the tools at its disposal to control inflation, said on Wednesday (8) the institution’s president Roberto Campos Neto.

While attending an online event promoted by Credit Suisse, Campos Neto said that the Central Bank was aware of the energy crisis but never expected that it would take such proportions. He also said that many shocks have occurred in the economy, with core inflation – which excludes temporary effects – being “much higher” than the Central Bank would have liked, and with the monetary authority now seeing reflections of this deterioration in the long end of the yield curve.

“We think it’s very important to act quickly on this, to make sure that there is no de-anchoring in the system that would generate inertial inflation heading much higher,” he said.

“What needs to be said is that we have autonomy, we will act independently with the tools we have, we think the tools we have will do the job and we need to make sure we report that wisely,” he added.

Campos Neto’s message comes amid a sharp rise in prices in the economy this year, driven by the water crisis that pushed up the cost of electricity as well as by the increase in commodity prices and the dollar – the latter affected by fiscal and institutional concerns, with president Jair Bolsonaro’s confrontational stance toward the Federal Supreme Court (STF) contributing to heightened uncertainty.

The framework of multiple shocks has also worsened inflation expectations for 2022, Campos Neto said, despite having reiterated that there is a large gap between market projections, higher, and the monetary authority, lower, for the IPCA next year.

Market agents have continuously worsened their projections for inflation, now at 7.58% for this year and 3.98% for next year, according to the latest Focus report. The center of the official target for 2021 stands at 3.75% and for 2022 at 3.50%, both with a tolerance margin of 1.5 percentage points up or down.

In its last public projection in August, the Central Bank forecast inflation precisely in the target center for 2022, at 3.5%, with a high of 6.5% this year.

ELECTIONS

Planning for re-election, Bolsonaro has blamed governors and the social distancing measures implemented during the Covid-19 pandemic for the country’s rising inflation.

In his speech, Campos Neto said that the presidential elections are an important factor and that they will be polarized, which impacts volatility. But he reiterated that the Central Bank will act independently in this scenario.

“We have to understand how (elections) impact our mandate and translate into inflation and growth. On our part, what we can do is say that we are going to use the tools we have to guarantee that we reach the (inflation) target, we have complete autonomy now and we are going to use this, in the sense that our only commitment is to ensure that we reach the targets,” he said.

Voted by Congress, the Central Bank’s autonomy was recently sanctioned by the Federal Supreme Court, establishing fixed terms of office for its president and directors. These mandates do not concur with those of the President in order to protect the institution from political interference.

According to Campos Neto, the fact that market agents associated the reforms proposed by the government with the desire to implement a larger income transfer program in an election year contributed to increase uncertainty.

He pointed out that it is necessary to “turn the page” with respect to the structuring of the “Auxílio Brasil” (Brazil Aid), as the new “Bolsa Família” (Family Grant) has been renamed, knowing how the program will be implemented and how it will be financed. “Once we do this, I think a lot of the noise will subside,” he said.

Since it raised interest rates by 1 point, to the current 5.25% a year, the Central Bank has signaled that it will do so again at its next Monetary Policy Committee (COPOM) meeting at the end of this month. The Central Bank has also signaled that it aims to take the SELIC rate beyond neutral levels, suggesting that the rate will close the monetary tightening cycle above 6.5%.