The president of the Central Bank (BC), Roberto Campos Neto, repeated that the great challenges of Brazil are always linked to the fiscal and returned to reinforce the need for policies that transmit credibility on the Brazilian public accounts.
“We managed to break the dynamics of high interest rates in Brazil when we managed to show the market that we were on the path of fiscal convergence. So, I think it is a lot about the fiscal,” he said, participating in the Spring Meeting of the International Monetary Fund (IMF) ) with the World Bank, recorded on April 1.
Once again, he argued that the increase in recent inflation in Brazil is due to the growth in international commodity prices, while the real has depreciated against the dollar.
“In fact, the local price of commodities has grown a lot. In the case of food items, such as soybeans and corn, with the increase in Asian demand, especially in China and India. In the case of metals, there are recovery programs in several countries. . And in relation to oil, there is the effect of the expectation of greater global growth “, he repeated.
Campos Neto also reconnected emergency aid – ended in December last year and resumed as of this Tuesday, 6th – to the rise in prices of consumer goods. “We transferred a large amount of money that became consumption. The products in the basket of the people who received the aid had a higher price increase,” he said.
Roberto Campos Neto again classified inflationary shocks in Brazil as temporary, but reaffirmed that the monetary authority already sees the contamination of other inflationary nuclei and, therefore, started the current cycle of high interest rates.
“Between one Copom meeting and another, the projection for 2021 inflation jumped from 3.4% to 5.0%. Most of this difference was caused by the effect of commodities. We started to see some contamination in other nuclei and we started what we call the partial normalization process, which is always difficult to explain while the country still suffers from the effects of the pandemic “, affirmed the event of the International Monetary Fund with the World Bank.
Campos Neto returned to claim that when the Copom lowered the Selic rate to 2.0% per year – in August last year – the BC expected a scenario that did not come to fruition, of a major retraction in the economy and inflation below the floor of the target for 2020. “This was never achieved”, he added.
The BC president repeated the assessment that Brazil continues to demand a stimulating monetary policy, and that is why the Copom has called the new cycle “partial normalization”. Once again, he pointed out that formal employment is recovering very fast, but stressed that he still sees problems in the informal workforce.
Roberto Campos Neto, repeated the assessment that the global market is going through a “reflection”, characterized by a movement of high prices coupled with a recovery of the economy. According to him, this issue is behind the increase in international commodity prices that have impacted inflation in Brazil.
“If you go back to November last year, we at BC understood that we had the ingredients for a ‘reflation trade’. At international meetings, there was a feeling that inflation would remain low for longer, with low interest rates. Everyone thought that we wouldn’t see inflation for a while and the market was prepared for that. And then that started to change at the end of the year, “he said at the Spring Meeting of the International Monetary Fund (IMF) with the World Bank.
According to Campos Neto, while the majority of countries still provided huge fiscal and monetary packages in a coordinated manner, a light on vaccination in these places was beginning to be seen. “The stimuli are still great, and at the same time people are beginning to see a better environment for the economy. This caused the beginning of the reflection”, he added.
The BC president highlighted the increase in the prices of commodities produced by emerging countries, while the currencies of these countries have not performed well. For him, part of the commodity price changes are more structural than some economists think.
“This means that the local prices of these commodities go up even more, which means that food inflation also goes up – and we have seen an acceleration in the last two months. This causes a differentiation, since in the emergency countries the weight of food in inflation is much greater than in developed countries “, he argued.
Campos Neto also recalled that most emerging countries had to launch large fiscal packages to face the covid-19 pandemic, which raised the debt of these economies. “So we are in this environment, in which the markets suddenly started to price that you need to raise interest rates, but you have a much higher debt. So the countries with the greatest indebtedness had a greater devaluation of their currencies, a greater increase in the premiums of risk at the end of the curve. And this differentiation was even greater “, he concluded.
China and emerging markets
The president of the Central Bank estimated that China has been absorbing a large part of the capital flows that previously went to emerging markets. “This is a phenomenon that we did not have before. There are questions about how the global value chain will be situated in the future and this affects the way people look at emerging countries,” he said.
Campos Neto also recalled that monetary normalization in developed countries should also cause some additional stress to emerging countries at some point. “We see a great differentiation (between emerging and developed) that reflects this”, he added.