Meirelles suggests that Lula 'let the Central Bank work and control inflation' and stop attacking the institution

This Thursday, the 16th, the National Monetary Council, made up of 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 today is 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 the Young Pan News, interviewed the former BC president and former finance minister, Henrique Meirelles. For the economist, it is fundamental that Lula stops attacking the economic authority: “As the president questions the action of the Central Bank, attacks, demands that interest rates drop and personally attacks the president of the Central Bank, all this generates 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, it harms the country and even the administration of the president himself. The best attitude he could take is to forget the Central Bank, he has 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 don't 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, the expenses must also be cut, which is not actually materializing yet”, he argued.

For Meirelles, the decision of the National Monetary Council was right 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 dollar exchange rate, referring to excess demand when the economy is very heated. But the expectation of inflation also has a very important effect, that is, what people expect from inflation. If you have an industry, a commercial store, which expects a greater rise in inflation, prices go up more in anticipation of this so as not to lose margin, you wait for interest rates to rise. So, it's a self-fulfilling prophecy, as inflation expectations rise”.

“If you raise the target at this point, 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, the expectation of inflation increases, even if the target had increased a little, we would have a drop in inflation necessary to reach that target, which could be the same or higher”, he explained.

The economist also rejected Lula's statements against the Central Bank's autonomy and defended the institution's independence: “The Central Bank operates based on technical criteria. In the same way that the Supreme Court or the Superior Court of Justice, for example, operate by 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 can pose a problem in managing the country's economy”. Regarding the position of Federal government, Meirelles explained that a State that spends a lot puts pressure on inflation and made an appeal 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 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 pushes the interest rate up, it's as simple as that. At the same time, it injects money into the economy by warming up a little, sometimes above what the economy is capable of producing at that time. 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 interest rates. Second, when the government spends a lot, it puts a lot of pressure on demand by injecting money into the economy and the economy is not prepared to produce that amount. There is also another inflationary pressure. Therefore, a bloated and spending government leads to an increase in inflation”, he declared. Check out the full interview in the video below..