Brazil Needs More Caution on Inflation, Ex-Central Banker Says
Brazilian policy makers should have been more cautious when cutting interest rates last year and now need to stress they will raise them as needed to bring inflation to target, according to former central bank President Ilan Goldfajn.
Rather than committing to a “partial adjustment” of monetary stimulus, the bank needs to show it’s ready to do whatever is necessary to control prices that will soon be rising by 8% a year, Goldfajn said in an interview on Tuesday. Likewise, the bank may have gone too far when it cut rates to an all-time low of 2% and signaled they would stay there for the foreseeable future, he added.
“In an emerging market like Brazil, using forward guidance is brave,” said Goldfajn, who presided over the monetary authority from 2016 to 2019 and is now chairman of the board of Credit Suisse Brasil. “Unfortunately, I feel that this instrument isn’t available for us yet.”
Policy makers in Latin America’s largest economy are trying to head off above-target inflation without crimping a fragile recovery. The central bank lifted its benchmark rate the most in a decade last month and signaled another hike of the same size is on tap in May -- promising however to maintain a stimulative monetary policy. Officials are also navigating a deadly virus wave that’s hurt confidence and imposed limits on commerce and movement.
Read more: Brazil Central Bank Defends Plans to Remove Part of Stimulus
A former Itau Unibanco chief economist who holds a doctorate from the Massachusetts Institute of Technology, Goldfajn won investor acclaim for pulling inflation to target from the highest level in over a decade, allowing the central bank to cut rates to a record low at the time. He improved the bank’s communication with investors and boosted its credibility.
Financial markets that were quick to say Brazil should have cut borrowing costs further last year are now concerned that the central bank is behind the curve on inflation, said Goldfajn, 55. Amid the noise, the monetary authority needs a tough stance that prioritizes keeping consumer price expectations down.
“If you are willing to do what’s necessary, perhaps you won’t be obligated to do it,” he said. “To the extent that people look at the central bank and know there will be a reaction, inflation expectations stay anchored.”
Despite the current monetary tighenting cycle, the benchmark Selic has settled at a new level of relative stability in the single digits, Goldfajn said. Lower borrowing costs compared to a few years ago will prevent the currency from strengthening to levels of 3 to 4 reais per dollar from the current level of around 5.50, he said.
Instead, it will likely fluctuate around 5 per dollar, strengthening slightly beyond that level on good news and weakening closer to 6 per dollar in the face of stress, Goldfajn said. He added that the central bank has done a good job overall in managing currency volatility.
Other key points:
- Advances in Covid vaccination and controlling the pandemic overall will be top factors in determining the strength of Brazil’s economic recovery in the short term
- While growth will likely be stronger in the second half of this year, activity could be hobbled in the event of fresh lockdowns
- Brazilian financial markets will likely face volatility surrounding presidential elections next year
- The global economic backdrop is currently benign due to stimulus and low interest rates, though there’s uncertainty as to whether that will last in 2022
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