06/26/2024 – 12:29
President Luiz Inácio Lula da Silva issued this Wednesday, 26, a decree that formalizes the adoption of a continuous inflation target from 2025.
The new system to replace the current model of seeking the goal in each calendar year was standardized one year after the announcement of its adoption by the government. The long-awaited regulation, with details about the dynamics of the new model, was published in the Official Gazette of the Union this Wednesday.
According to the decree, the target will be considered missed when inflation accumulated over twelve months “deviates for six consecutive months from the range of the respective tolerance interval”.
The center of the official inflation target for 2024, 2025 and 2026 is set at 3%, with a tolerance margin of 1.5 percentage points either way.
The decree was published before the National Monetary Council (CMN) meeting, in which the board is expected to set a continuous inflation target of 3%. The CMN meeting is scheduled for this Wednesday, from 3:00 p.m. to 5:00 p.m. The board is a body formed by the Ministers of Finance and Planning and the President of the Central Bank.
What changes in the inflation target
The CMN, which brings together the Ministers of Finance and Planning and also the President of the Central Bank, periodically sets a target for the Broad Consumer Price Index (IPCA) for the year. It is up to the Central Bank to pursue this goal, using the monetary policy instruments within its reach – the interest rate (Selic) being the main one.
Until now, the inflation target was valid for the calendar year. In other words, what mattered was that it was within the target on December 31st, even if it remained outside the target throughout the year.
From 2025 onwards, when the Central Bank will have a new president, this target will become continuous, as is already the case in most countries that adopt the inflation targeting system. This means that the BC will have to permanently look at the target, and not just at the result at the end of the year.
For experts, the change to the continuous target can help the Central Bank to manage inflationary shocks. Between March 2021 and August 2022, for example, the Copom raised interest rates from 2% per year to the current level of 13.75% per year to try to combat the increase in inflation due to the shocks caused by the pandemic.
Another highlighted point is that the new regime reduces the risk of economic populism. To keep inflation within the limits established by the target at the end of the year, many governments chose to hold back public transport fares, fuel and electricity prices.
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