Campos Neto: high interest rates in an election year shows technical criteria

The statement was made this Tuesday (25), in Brasília, during a public hearing at the Senate Economic Affairs Committee. According to him, “never in the history of this country, nor in the history of the world, has there been such a huge increase in interest rates during the electoral period, showing that the Central Bank, even during the electoral period, understood that inflation was going to rise”, he explained. .

Campos Neto recalled that this movement started in Brazil before most other countries. “Brazil was one of the first to raise interest rates. It made a very big rise in the election year, and we can see the comparison with other election years. If the Central Bank had not made this move, we would have had inflation of 10%, instead of 5.8% ”, he argued.

“Then, today, for us to control inflation – and the expectation for next year, which would be much higher than the 10% – we would have interest rates of 18.75% (per year)”, he added, reiterating the defense of the BC’s autonomy. “It is important to understand that the BC acts autonomously and has accumulated before. And the sooner you act, the less cost it has for society”, he added.

Inflation

Campos Neto described Brazil’s financial scenario with the average of core inflation at 7.8% and the Selic rate at 13.75% per year.

“Look how curious: we have core inflation (of) 7.8% and interest of 13.75%. Last time interest was (at) 14.75%, core inflation was more or less the same level as it is today. We have slightly lower inflation than when interest rates were at 14.25%. The fact that we acted before worked”, he argued.

In the BC president’s assessment, the measures adopted by the monetary authority have been applied smoothly to avoid major shocks in the immediate term.

“One of the parameters that is in the mandate (in BC) is smoothing. Yes, BC softens. If I wanted to fight the shock in the short period, I would have to have very high interest rates (later). We’re not going to do that. Smoothing means lengthening the horizon to have inflation controlled within a horizon that is relevant, with the least possible social cost,” he said.

Credibility

The president of the Central Bank added that the objective is also to avoid extending this “horizon” too much, since it is necessary for the government to maintain credibility.

“When you stretch the horizon too far, eventually you lose credibility, and if you lose credibility, the expectation of inflation going forward rises and contaminates present prices. Then, afterwards, the cost is much more expensive”, he pondered.

“The world does not revolve on Selic (basic interest rate). Much of the interest is prefixed. Controlling one-day yields does not guarantee (fall for) the rest of the yield curve, which is determined by the price people are willing to lend to the government. So, if I don’t have credibility, I can make short interest rates fall, but the others will rise because the economy doesn’t revolve around short interest rates,” he said.

According to Campos Neto, what makes a sustainable drop in interest rates possible is the ability to make short-term interest rates fall, and this curve to perpetuate and propagate.