For experts, Haddad’s “economy” speech concerns the people

In December 2022, shortly before taking over the Ministry of Finance, Fernando Haddad said in an interview that, at that moment, the most important thing for members of the new government was “to harmonize fiscal and monetary policy”. The minister’s statement soon became a kind of guideline for the economic team. Since then, Haddad and other members of the federal government have repeated it in different circumstances.

Last week, when talking to journalists about his nomination for the Monetary Policy Board of the Central Bank (BC)the executive secretary of the Ministry of Finance, Gabriel Galípolo, promised that, if the Senate approves his appointment, it will work for harmony between fiscal and monetary policies.

Galípolo is number two in the hierarchy of the ministry commanded by Haddad and seen by market experts as a potential substitute for the current president of the BC, Roberto Campos Neto, whose mandate ends in 2024. He highlighted that, at the head of the portfolio, Haddad “has been trying to avoid a mistake that has existed for a long time in the Brazilian economy, which is having a monetary policy that goes one way and a fiscal policy that goes the opposite way”.

This Friday (19), the minister himself once again mentioned the importance of “harmonizing” fiscal and monetary policies, “making fiscal responsibility compatible with the legitimate demands of society. Hours later, the ministry itself assured, in a note, that Haddad’s words “highlight a vision of economic management that does not see fiscal and monetary policy as opposing elements, but rather as ‘two arms of the same organism that need to work together'” .

translating the speech

For economists interviewed by Agência Brasil, behind Haddad’s phrase is a dispute over economic decisions that affect citizens’ daily lives, such as interest rate settings and the weight of future public investments to stimulate the Brazilian economy.

“Harmonization is important because the more coordinated or tuned the fiscal and monetary policies, the greater the effectiveness of the economic policy”, stated the professor at the Institute of Economics at the State University of Campinas (Unicamp), Simone Deos. “The minister seems to say all the time that the Ministry of Finance and the BC cannot make economic policy in an uncoordinated way”, she anticipated.

Economic Policies

Along with exchange rate policy, fiscal and monetary policies structure economic policy, that is, the set of measures that governments adopt to encourage the sustainable growth of productive activity in countries and guarantee the well-being of societies.

Roughly speaking, monetary policy concerns the actions that, in Brazil, the Central Bank prescribes to control the cost and quantity of money in circulation in the country. Fiscal policy, on the other hand, comprises the measures that the federal government adopts to control the public budget, that is, government collection and investments.

In Brazil, monetary policy is conducted by the BC, an independent authority that, in addition to preserving the soundness of the financial system, acts to keep inflation under control, preserving the value of the Real and maintaining the purchasing power of Brazilians. The fiscal policy is defined by the federal government and expressed in the Budgetary Guidelines Law (LDO), approved by the National Congress.

The main instrument of monetary policy is the aforementioned Selic rate, set every 45 days by the Monetary Policy Committee (Copom), a body of the Central Bank created in 1996 with the function of establishing monetary policy guidelines and monitoring the achievement of targets. inflation rates defined by the National Monetary Council.

Since August of last year, the Copom has maintained the Selic rate at 13.75% per annum. The percentage is the highest since January 2017. Which, according to investment fund manager Infinity Asset Management, makes the Brazilian real interest rate (basic interest rate minus projected inflation for the next 12 months), which at the beginning of month was 6.82%, the highest worldwide. In nominal terms, Brazil started the month only behind Argentina, where the official interest rate was 91% per annum.

The National Monetary Council, made up of the Ministers of Finance, Planning and the President of the Central Bank, set the inflation target for this year at 3.25%, with a tolerance of 1.5 percentage points, that is, it may reach 4.75%. However, in the last Inflation Report released at the end of March, the BC admitted the possibility of official inflation exceeding the ceiling of the target.

Coordination

“Theoretically, the Central Bank maintains very high interest rates because it has to meet the inflation target at all costs,” said Carlos Pinkusfeld Monteiro Bastos, professor at the Institute of Economics at the Federal University of Rio de Janeiro (IE-UFRJ). , for whom the “harmonization” proposed by members of the federal government involves more than one interpretation.

“It could either indicate (that the government recognizes) the need to make adjustments in fiscal policy that allow the Central Bank to start lowering interest rates, or it could point out that if interest rates do not lower, the federal government will not be able to conduct fiscal policy the way he planned, being forced to adopt a much more austere, contractionary line. But one thing is certain: when speaking of fiscal and monetary harmony, the minister (Haddad) is referring mainly to the interest rate and the need to reduce it, which is indeed very important for the citizen’s daily life”, scored Bastos.

“What the minister seems to be trying to build is a certain path of possible coordination of economic policies”, interpreted Simone Deos, recalling that since the beginning of 2021 the Central Bank has autonomy in relation to the federal government and that the president and directors of the autarchy have terms of four years that do not coincide with the terms of presidents of the Republic. The idea is precisely to try to avoid possible political interference.

“This coordination should always be a government objective. Now, when central banks become independent or autonomous, this becomes more challenging, as they no longer need to make (monetary) decisions according to the government’s fiscal policy – which can lead to loss of objectivity and effectiveness of the economic policy”, added Simone.