In an interview with Jornal da Manhã, from Jovem Pan News, the former president of the BC and former Minister of Finance defended the autonomy of the monetary authority and commented on the current Brazilian economic panorama
This Thursday, the 16th, the National Monetary Council, formed by the ministers of Finance, Planning and the president of central bank (BC) met for the first time in 2023. In the wake of the president's attacks Lula (PT) to the BC, due to the maintenance of the interest rate, the council chose not to change the center of the inflation target, which currently stands at 3.25% for 2023 and 3% for the following two years, with a margin of 1.5 plus or minus percentage point. To talk about this current economic panorama, Jornal da Manhã, from Jovem Pan News, interviewed the former president of the BC and former Minister of Finance, Henry Meirelles. For the economist, it is essential that Lula stops attacking economic authority: “As the president questions the action of the Central Bank, attacks, demands that interest rates fall and personally attacks the president of the Central Bank, all of this creates insecurity about what will happen in the economy and with inflation”
“This means that, in reality, the economy may even grow less and inflation may rise, because expectations and insecurity rise. Companies can raise prices even as a precaution, so as not to lose margin and incur losses. This harms everyone, harms the country and even the administration of the president himself. The best attitude he could take is to forget about the Central Bank, there is a lot to do, the country is full of problems. The government has several areas of action in the field and I believe that the best thing now would be to let the Central Bank work and control inflation. While the government has to work on fundamental things, such as cutting expenses so that we do not have an expansion in public spending, which also puts pressure on inflation. At the same time that the necessary expenses have to be expanded, as is being done, spending cuts also have to be made, which is not actually happening yet”, he argued.
For Meirelles, the National Monetary Council's decision was the right one precisely to maintain control of inflation in the country and not promote a spike in prices: “I believe it is the best option because inflation has several components. It has components referring, for example, to the exchange rate of the dollar, referring to excess demand when the economy is very heated. But inflation expectations also have a very important effect, that is, what people expect from inflation. If you have an industry, a commercial store, that expects a greater rise in inflation, prices rise more in anticipation of this so as not to lose margin, you expect interest rates to rise. So, it is a self-fulfilling prophecy, as inflation expectations increase.”
“If the target was increased at this time, it would only lead to an increase in inflation expectations. So, we would have a high interest rate to bring inflation exactly to the new target. There would not be a drop in interest rates, quite the contrary, there could be an increase in interest rates. On the one hand, inflation expectations increase, even if the target had increased a little, we would have a drop in inflation necessary to reach that target, which could be equal or greater”, he explained.
The economist also rejected Lula's statements against the autonomy of the Central Bank and defended the institution's independence: “The Central Bank operates based on technical criteria. In the same way as the Supreme Court or the Superior Court of Justice, for example, they operate according to technical criteria, in this case legal. In the case of the Central Bank, these are economic criteria. It is important that this type of institution has its independence because, otherwise, the government could always try to obtain, in politics it is normal, short-term gains. This could pose a problem in managing the country’s economy.” Regarding the stance of the Federal government, Meirelles explained that a State that spends a lot puts pressure on inflation and called for spending cuts: “When the State spends a lot, there are two things that need to be considered. First, he does not have this resource, he is not receiving enough tax expenses to pay for this increase in expenses, so he has to borrow money, that is the first issue”.
“There are two phenomena that happen there. The moment the government borrows money, it goes to the market and takes money and puts pressure on the interest rate, it's as simple as that. At the same time, it injects money into the economy, sometimes heating it a little above what the economy has the capacity to produce at that moment. What happens? Inflation also rises. So, we have two inflationary factors. First, when the government has to borrow resources to spend more and more, and this puts pressure on the interest rate. Second, when the government spends a lot, it puts a lot of pressure on demand, injecting money into the economy and the economy is not prepared to produce that amount. There is also other inflationary pressure. Therefore, a bloated and spending government leads to increased inflation”, he declared. Check out the full interview in the video below.