Fall in inflation is slower than expected, says Campos Neto

“Disinflation in the country is slower than we expected. It is consensus at central banks that the job is not yet done. You have to be persistent”, said Campos Neto at a meeting of the European Economics & Financial Center, in London. The BC president is traveling to the United Kingdom, and the meeting was broadcast virtually.

According to Campos Neto, full inflation by the Extended National Consumer Price Index (IPCA) continues to fall because of the exemptions decided last year. However, core inflation remains high, even with basic interest rates at the highest level in six years.

“The full inflation index is very polluted by the tax changes that are taking place, so when we look at the core, it is around 8%, which is still very high. In terms of the output gap (a measure of how much the economy produces less than capacity), we see no change even though the economy is slowing down,” he declared.

Expectations

According to Campos Neto, the Central Bank is more concerned with inflation expectations, mainly for 2025 and 2026. He explained that the BC projects IPCA of 5.8% in 2023, 3.6% for 2024 and 3.2% for 2025. Despite the drop, Campos Neto pointed out, expectations point to inflation above the center of the target.

“When we look at our projections, we have 5.8% (for the IPCA) for 2023 and 3.6% for 2024, 3.2% for 2025 and, obviously, we have a context of better numbers, but still far from our target. We always say that the decision is based on three dimensions of data, we look at current inflation, the output gap and expectations (of inflation)”, he highlighted.

The National Monetary Council (CMN) sets an inflation target of 3.25% for 2023 and 3% for 2024 and 2025. In all years, there is a tolerance interval of 1.5 percentage points, more or less. According to the BC president, part of the increase in expectations for the long term is due to noise caused by the change of government.

“There is a question about why we have rising medium and long-term inflation expectations if short-term inflation surprises are positive. I think the issue here is that some noise was created in the change of government; when we look at why inflation dropped in the long term, part of the explanation is related to the fiscal package that was approved (Constitutional Transition Amendment) and part to the government talking about changing the targets”, he said.

Tax framework

Campos Neto commented on the complementary bill of law for the new fiscal framework, sent this Tuesday (19) to Congress. He said he considers the text “quite reasonable”, but that the final assessment will depend on the speed of Congress in voting on the project and any changes included by parliamentarians. “I think that was a good indication that we are moving in the right direction.”

“We had the new fiscal framework, the text was sent yesterday, I didn’t have time to look at all the details, but it seems in line with what I had seen before”, he said. Campos Neto, however, said he did not see a “mechanical relationship” between the approval of the new fiscal anchor and an eventual drop in interest rates.

The BC president also commented on a possible change in inflation targets and said that the body is against the idea because it would not result in an immediate cut in interest rates and a measure in this sense would increase Brazil’s risk premium.

“We think it is not something that the Central Bank decides (but the government). The mandate is very clear,” he commented. Campos Neto added that an eventual increase in the targets would convey to the market the idea that the government intends to gain flexibility in monetary policy, but admitted that there are members of the BC board who think differently.