The president of the Central Bank, Roberto Campos Neto said this Friday (25) that there is a clear message in the world that fiscal frameworks need limits. “There is a need for greater coordination between fiscal and monetary policies. You cannot have fiscal policy on one side and monetary policy on the other”, he said at the annual luncheon of bank leaders promoted by Febraban.
Among the guests at the event were two former ministers of PT governments: Alexandre Padilha and Fernando Haddad, who are on the transition team.
To illustrate the concern about how fiscal policy interferes with the BC’s work, Campos Neto showed graphs on the future interest curve that already prices a rise in the Selic next year, when the bet was on cuts. The change happened when news broke about the intention of the new government’s transition team to ask for an overrun of the spending ceiling of around R$ 200 billion.
“In Brazil, the market expects interest rates to rise again due to uncertainty about the fiscal framework. The BC does not make fiscal policy, we used fiscal policy as part of our modeling and Brazil priced in a drop in interest rates that was reversed,” she said.
For Campos Neto, the battle against inflation has not been won, neither locally nor globally and it is still necessary to be cautious and the disinflation process will not be linear. He said there is still a clear message in the world that fiscal frameworks need limits.
According to Campos Neto, part of the resilience of the current inflationary process in the most developed countries can be attributed to the model that prevailed in recent years. “We were coming from a period of great bonanza, with low interest rates all over the world and countries printing money without generating inflation. But cracks began to appear in this model”, he said, explaining that the drop in productivity was one of those effects.
For him, the effects of changes in demography, the rupture of global chains and the effects of technological cooperation were clouded by excess liquidity. And that made the governments accommodate in relation to the reforms. “Every time productivity drops, governments make reforms, but this has not happened in the last 25 years. We have only seen this in emerging markets,” he said.
This diagnosis was presented when Campos Neto was explaining why there was criticism in relation to the performance of Central Banks, especially in relation to the lack of forecasts about the generalized increase in respect that followed the pandemic. “We (the Central Banks) prepared for a recession and a depression came,” he recalled.
According to him, it was difficult to understand the impact of the health crisis on demand, especially for goods, which generated a shift in energy demand for production. And this happened at a time of transition to sustainable energy, which demands investments that have a longer macroeconomic impact.
The consumption of goods, said Campos Neto, has gone up a lot and has not fallen until today. He also recalled that there was a mistaken thesis that a demand problem would not be generated because people were at home during the pandemic. So when people’s mobility came back, it would naturally balance out. But that’s not what happened. “For the first time, energy prices went up and energy capex went down and that made inflation more persistent,” he says.