The president of the Central Bank, Roberto Campos Neto, said this Thursday, at a press conference on the Quarterly Inflation Report (RTI), that the change in the monetary policy stance of the Federal Reserve (Fed, US central bank) does not affect very much the strategy of the Brazilian agency. Campos Neto recalled that part of the BCs had the premise that inflation was a transitory issue, with causes linked to supply, but argued that the numbers do not corroborate this, as he has been defending for some months. “The Fed has been assuming that inflation is more persistent and with a demand component.”
He pointed out that, after the Fed’s decision on Wednesday, the price hikes in the US yield curve were anticipated, but he said the market’s reaction was relatively benign. “The BC took the lead, made a move to adjust rates, taking into account that part of inflation was more persistent. So I don’t think it changes that much in terms of what we’re going to do. But it depends on how coordinated the interest rate adjustment in the world will be. What is important is whether we are going to have an organized or unorganized fixed income adjustment and what it means for the flow to emerging markets and to Brazil.”
Campos Neto also repeated that, in the BC’s assessment, the increase in the recent risk premium is partly related to fiscal issues in the short term, but also to a perception of the market of lower structural growth, which has implications for the trajectory of public accounts.
tax status
The president of the Central Bank also clarified that the basic scenario of the Monetary Policy Committee (Copom) does not take into account new news that worsen the perception of the fiscal situation. “Central hypothesis that we see is a continuation of improvement in the pandemic scenario, a stable level of uncertainty, with some improvement, but at a very high level and absence of issues that could worsen fiscal. We understand which page was turned in the fiscal, with what was approved. If new news shows further deterioration in the fiscal, this is not in our fiscal scenario.”
Asked if the BC was “isolated”, Campos Neto said that it is not about the BC being alone or not and that the autarchy does not analyze or criticize the fiscal policy, nor does it make projections. “What is important is what agents understand and how it impacts the macroeconomic scenario. We understand that there is a need for a program to fight the pandemic and to equate spending with quantity of resources. What we noticed is that there was questioning about the validity of the existing framework”, he commented, repeating that the market’s perception is that there was a breakdown in the framework.
Campos Neto also stated that the BC understands that part of the fiscal improvement will spread over the next few years.
Inertia
The president of the Central Bank said that the monetary authority continues to “investigate” the inertia of service inflation. “We are concerned with looking a lot at the differentiation between the industrial and service sectors.
In the last inflationary crisis, services were much higher and industrial prices were much lower,” he said.
The Central Bank’s Director of Economic Policy, Fabio Kanczuk, added that the BC’s exercises indicate that inertia has eased somewhat with the pandemic. “But we continue to use the same inertia of the past as a base”, he added.
Projections and goal
Kanczuk reinforced that, considering the balance of risks, inflation for 2022 is above the target, which demands a longer period of higher interest rates. “The information on this terminal fee is not deliberately given.”
In the basic scenario, BC estimates that the IPCA – the official inflation index – will end 2022 at 4.7%, but the asymmetry caused by fiscal questions leads the committee to see the index above the target. Next year’s target ceiling is 5.0%.
Kanczuk also added that, despite the projection for inflation for 2024 being below the target (by 2.6%, against the center of the target of 3.0%), this year it is not in the relevant Copom horizon, which includes 2022 and 2023 with equal weight.
The Director of Economic Policy also said that the Copom is concerned and looking at the risk of unanchoring in the long term and that there is no conflict with the objective of reaching the target in the relevant horizon.
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