Brazil’s economic team is considering an early review of the country’s inflation targets in an attempt to defuse tensions between the central bank and President Luiz Inacio Lula da Silva, who has been publicly pushing for higher goals and lower interest rates, according to two government officials with knowledge of the matter.
(Bloomberg) — Brazil’s economic team is considering an early review of the country’s inflation targets in an attempt to defuse tensions between the central bank and President Luiz Inacio Lula da Silva, who has been publicly pushing for higher goals and lower interest rates, according to two government officials with knowledge of the matter.
Local assets tumbled on the report, with the real leading losses among emerging markets, as investors didn’t count on the possibility of an imminent change to inflation targets. The national monetary council, the government body responsible for setting them, traditionally holds a discussion about the subject in June, when it was expected to define a goal for 2026.
But Lula’s growing complaints that 13.75% interest rates are choking the economy have some members of the economic team trying to bring forward a discussion to possibly increase the goals, currently set at 3.25% for 2023 and 3% for the next two years, said the people, who asked for anonymity because the discussion isn’t public.
Central bank chief Roberto Campos Neto would be in favor of a higher target, the officials said. He has a seat at the council, together with the finance and planning ministers. The council’s next meeting is scheduled for Feb. 16.
The central bank declined to comment. The finance minister said the national monetary council does not publish issues it will discuss in advance, only after a decision is made. The planning ministry didn’t immediately respond to a request for comment.
Steeper Yield Curve
The Brazilian real erased early gains and weakened more than 1% after the report. The Ibovespa index of stocks posted similar losses. While short-dated swap rates fell, indicating traders are betting on lower interest rates in the next few years, longer-dated ones jumped. Those maturing in January 2027 rose 13 basis points at 12:35 p.m. local time.
“My impression is that the central bank’s pledge to hold interest rates for a long period of time has its days numbered,” said Rafael Ihara, chief economist at Meraki Capital. “As long as we have uncertainty about meddling into the central bank, changes to inflation targets, we’ll see the yield curve steepening.”
Lula, faced with a weakening economy that threatens his ability to deliver on campaign pledges, has stepped up criticism of the central bank over the past few weeks. He has questioned a law that gave the bank its long-sought autonomy in 2021, and called on businesspeople to join him in protesting the level of interest rates.
In a TV interview on Jan. 18, the president said the ideal inflation target for an emerging-market country such as Brazil is 4.5%, the same that was in effect during his previous two terms. Even if it agrees to increase the inflation goal, it’s unlikely that the monetary council would go as far as set a 4.5% target again as such a level would contribute to the indexation in Brazil’s economy, one of the people said.
Why Lula Is Clashing With Brazil’s Central Bank: QuickTake
One the other hand, a slightly higher inflation target would allow the central bank to start cutting interest rates faster, the people said. The monetary authority has said it will keep the benchmark Selic rate at its current level until inflation expectations return to targets.
Outgoing Monetary Policy Director Bruno Serra said on Wednesday that the central bank’s job is to pursue the monetary council’s targets, which are not set by the bank.
“Our most challenging job right now is to anchor inflation expectations,” he said, noting that economists have recently revised up their estimates for consumer price increases in the long term. “A central bank that has no credibility to deliver on targets, whatever they are, is bad for society.”
–With assistance from Maria Eloisa Capurro, Vinícius Andrade and Josue Leonel.
(Updates with market reaction in second and sixth paragraphs, adds comments from trader in seventh paragraph and from central bank director in final paragraph.)
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