central bank It will take at least two years’ work to achieve inflation Back to Target in Brazil in Assessment of the Current Chairman of Credit Suisse In the country and Ilan Goldfjön, the former President of B.C. For him, midway through this, there will be a relevant slowdown in economic activity, perhaps next year’s recession.
“If we can have a stable exchange rate next year, it will help with inflection. And that would be ideal for better financial solutions, but we are not seeing that,” he explains. He believes the current inflation picture is, in large part, the result of “a lot of domestic effort” to create uncertainty. “We have spent the last two years with fiscal, economic, political and institutional uncertainties. One day the bill comes,” Ilan told Estadio/Broadcast. Read the interview below.
Recently, the President of the Central Bank, Roberto Campos Neto, acknowledged that inflation is widespread in Brazil and that the job of the Monetary Authority may be more difficult than expected. What is your rating?
In fact, inflation in Brazil is reaching around 11% in 12 months. The big question is hard work. Inflation has been around the target for a long time, a more comfortable position, but now, unfortunately, it is back at around 11%. I think the work ahead of BC to moderate inflation over time will be long, about two years. And this is made more difficult by the absence of the notion of a more defined fiscal anchor, such as when there was a limit. We also have high global inflation and we have a more polarized political landscape next year. I see at least two years of hard work ahead, and there are a number of external elements that make it difficult. Will have to see how interested you are. I think that by the beginning of next year – and throughout – the interest will be higher, it will be held up for a while, and only then it will start falling.
And is this scenario more tied to internal issues, next year’s election, or external issues?
It is almost always a combination of external and internal. Part of inflation is external and something we create ourselves. There is a contribution from both sides. It helps if global inflation goes down, but we still have our share here. I don’t think our inflation is simply a result of external global inflation. I think there is a combination. It is difficult to know the exact weight.
Campos Neto said Brazil is experiencing a “unique moment” with internal inflation and still importing global inflation.
Over the years, we have had a relatively benign international scenario, with controlled inflation and very low interest rates in the world. And it helped Brazil reduce inflation and interest rates. But, as you know, we already had 11% inflation at the beginning of 2016, and an interest rate of 14.25% in terms of zero international inflation and negative interest. So, we manage to bring inflation on our own. But of course, when the international scenario is benign, it is much better. But as the international scenario becomes more difficult, it will make our life even more difficult.
When the United States began its process of raising interest rates, what about monetary policy in Brazil?
It becomes dire, as it usually happens that an increase in US interest rates is an attraction of money to the United States. In addition, it often leads to the strengthening of the dollar and the weakening of world currencies against the dollar. A depreciating exchange rate in emerging economies puts pressure on inflation and, therefore, on monetary policy.
If the Federal Reserve (Fed, US Central Bank) starts raising interest rates there next year, it could end the turbulent period of elections in Brazil, when exchange rates have traditionally risen.
Next year will be challenging. It will not be easy, as we will face the most difficult international scenario. We can increase the US interest rate, it is not yet defined. One of the most pertinent questions in the global economy is whether international inflation is something that will begin to decrease or continue to rise over the next year. The scenario in which inflation will continue to rise and interest rates in the United States will begin to rise further makes 2022 more challenging. Domestically, we will not only have an election year, which is usually more volatile, but also campaigns that contain promises that raise doubts. We enter the next year with this international context and do not know whether the fiscal anchor will be the spending limit or not inflation needs to be brought down. Hence, the year will be a fighting one with inflation, fiscal uncertainty, election scenario and the possibility of rising interest rates in the world.
The November IPCA-15, which was at 1.17%, saw a decline over the previous month, but analysts indicate there is a larger spread. What are the conditions for turning?
Our inflation in Brazil is very high and we want to see some changes going forward. For this some conditions are necessary. Firstly, the Central Bank is already reacting, but unfortunately the economy will slow down. If we can keep a stable exchange rate next year, it will help inflection. And having a better fiscal solution would be ideal, but we don’t see that happening. So, we will have a longer period of fighting inflation, a relevant slowdown in activity, perhaps a slowdown next year. It is because of the battle that needs to be fought, the uncertainties, the international scenario. There are all conditions for the download, but it will not be instant.
Is inflation sprouting fast enough to find fertile ground in Brazil?
We obviously have our inflationary records, our risks, but I don’t think we have the “fertilizer” here. We have a lot of effort to create uncertainty. We have spent the last two years with fiscal, economic, political and institutional uncertainties. One day the bill arrives. The first two years were a conflict between the federal government and Congress. Then, many noise in the fight against the pandemic, institutional conflicts. We spent this year discussing whether the debate would continue on “four lines.” There was a manifesto in favor of democracy. All this is a lot of uncertainty for a country and one day the bill comes. So when you ask whether inflation is widespread, I say no. We were the ones who made a lot of noise and made a lot of effort to create this uncertainty that led to inflation.
And these noises directly affected the exchange rate.
There are many transmission channels and one of them is exchange. The appreciation of the exchange rate should have accompanied the growth of commodities and it did not. One more thing: Inflation expectations are bad when you don’t know what will happen in the future. Therefore, there is nothing structurally bad for inflation in Brazil. There is a lot of downward effort being made to contain inflation.
What if you say the exchange rate can be more stable to help the central bank?
It will depend on the international scenario. There might be a more benign international scenario, in which external inflation was actually the effect of the pandemic, which rose and then fell, and an election scenario, there was not much noise here. Then the dollar doesn’t get stronger and helps us.
What can effectively help the central bank, strictly from a fiscal point of view?
Brazil has a problem it has yet to solve: how it is going to organize its public accounts. You want to spend more than you finance. In other words, we don’t want inflation financing, we want inflation to fall and not rise. We don’t want a higher tax burden, because the CPMF voted there, it was clear. And, it is difficult to finance through loans, as there must be an assumption that credit will not continue to grow. So you need a fiscal anchor, a limit or something like that. Since we don’t have a clear definition of where we want to spend, we spend on everything: social, health, education, civil service, retirees, amendments, subsidies. And we still keep asking. There is a cultural perception that the state is indebted to us. To help the Central Bank, it is necessary, politically, to decide what it will finance. Economically, this means letting the BC decide for society what it wants to do, where it wants to spend it and how it wants to finance it. You don’t want a spending limit, okay, but what would the limit be? What doesn’t work is not restriction, because then, inflation is eventually pushed as the solution in the absence of others. In this scenario, the central bank will not be able to control [a inflação] Because the inspector is pulling the other side.
In which year the independence of the Central Bank was approved, was the effect on monetary policy zero?
The autonomy and independence of the central bank, both legal and real, helps not to make the situation worse. Without a fiscal anchor, with all these noises, a polarized election year and facing an outlandish scenario, the situation will be worse if it doesn’t have a BC that everyone seems to be reacting to, which is fueling interest rates. and will try to control inflation. The problem is that it doesn’t solve everything on its own.
