by Bernardo Caram
BRASÍLIA (Reuters) – The Central Bank expressed concern about the adoption of fiscal policies that seek to control inflation in the short term, noting that the measures could have the opposite effect, of rising prices, the minutes of the Monetary Policy Committee (Copom) showed. released this Tuesday.
The document did not concretely advance information that could indicate what percentage of monetary tightening will be adopted at the next collegiate meeting, in March, maintaining the position presented in last week’s communiqué that it is more appropriate for the pace of the highs cycle to be reduced. , leaving the magnitude undefined.
“The particularly high uncertainty about prices of important assets and commodities, as well as the stage of the cycle, made the Committee consider it more appropriate, at this moment, not to signal the magnitude of its next adjustments”, he informed.
According to the monetary authority, since the last Copom meeting, in December, most commodities reversed the fall observed at the end of the year and, in some cases, reached recent records, reinforcing the global environment of more pressured prices.
The assessment of the risk of using government coffers to alleviate product prices was presented in the midst of discussions in the Executive and Congress on a possible tax cut to alleviate the amounts charged for fuel. Proposals on the subject are already being processed by the Legislature, with impacts that can exceed 50 billion reais a year.
“The Committee notes that even fiscal policies that have a downward effect on inflation in the short term can cause a deterioration in risk premiums, an increase in inflation expectations and, consequently, an upward effect on prospective inflation”, highlighted the BC.
Last week, the BC increased the basic interest rate by 1.50 percentage points, to the level of 10.75% per year, but indicated a reduction in the pace of adjustment at the next Copom meeting, in March, in addition to pointing out that the relevant horizon of monetary policy includes, “to a greater extent”, the year 2023. The assessments were repeated in the minutes of the meeting released this Tuesday.
In the minutes, the BC also showed a relevant revision in the projection of high administered prices, a category that includes electricity, cooking gas, water and sewage tax and urban transport. The estimate is now up 6.6% for 2022, compared to a 3.8% forecast made in December. The change was made even with a reduction in the hypothesis for the tariff flag of the electricity bill, from the “water shortage” category to “red level 1”.
“The review was mainly due to the strong advance in oil prices since the last meeting of the Committee, as well as to managed items whose variations should be repeated throughout the year. These pressures were only partially offset by the change in the tariff flag hypothesis for the end of 2022, which reflected the improvement in the water scenario”, he said.
TAX PERFORMANCE
In the minutes, Bacen reinforced its position that, despite the more positive performance of public accounts, uncertainty regarding the fiscal framework keeps the risk of de-anchoring inflation expectations high.
“This implies a greater probability of paths for inflation above the projected according to the baseline scenario”, he said, noting that the scenario may lead to a greater probability of alternative scenarios that consider higher neutral interest rates.
In view of the asymmetry of risks associated with the fiscal scenario, the BC considered that its projections for inflation are above the target for both 2022 and 2023. Therefore, the tightening cycle should be more contractionary than that used in the reference scenario over the relevant horizon.
“It was concluded that a further adjustment of 1.50 percentage points, followed by additional adjustments at a slower pace at the next meetings, is the most appropriate strategy to achieve sufficient monetary tightening and ensure the convergence of inflation over the relevant horizon, as well as anchoring expectations for longer terms”, he said, before reaffirming that the tightening cycle should advance into significantly contractionary territory.
ECONOMIC SCENARIO
The minutes reinforced that the external environment remains less favorable, explaining that the greater persistence of inflation in the United States increases the risk of a monetary tightening in that country, which makes financial conditions more challenging for emerging economies.
For the BC, the new wave of Covid-19 adds uncertainty about the pace of activity and may delay the normalization of global production chains.
Regarding activity in Brazil, Bacen stated that indicators related to the trade and services sectors showed a slightly better evolution than expected in November, while industry showed recovery in December.
For 2022, although it notes that growth tends to benefit from the normalization of activity and the performance of agriculture and the labor market, the Copom has reservations about the future.
“The confidence indices released since the last meeting continue to show deterioration, and climatic developments have affected the projections of important agricultural crops”, he pointed out.
In this scenario, the Copom stated that consumer inflation remains high, with an increase spread across several components, and continues to be more persistent than anticipated.
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