Brazil’s Campos Neto: not the time for experiments, but to improve credibility

(Reuters) – Brazilian central bank governor Roberto Campos Neto said on Tuesday the country is not at a moment when “it would be good to experiment” on monetary policy, reinforcing that raising the inflation target would not give policymakers flexibility.

Speaking at an event hosted by BTG Pactual, he reiterated that the tool of monetary policy is the interest rate, not the inflation target, amid speculation about increasing inflation targets following appeals from President Luiz Inacio Lula da Silva.

Asked whether the issue would be addressed at Thursday’s meeting of the National Monetary Council, Brazil’s highest economic policy body, he said that it would be necessary to wait and see.

The council is comprised of the finance minister, planning minister, and the central bank governor, so the federal government has two of three votes, a design Campos Neto said he agreed with.

The central bank chief stated that increasing the inflation target to gain flexibility in monetary policy would actually have the opposite effect by making agents adjust their inflation expectations upwards.

“The target in several Latin American countries is 3%,” he said.

This year’s inflation target is 3.25%, falling to 3% in 2024 and 2025, with a tolerance of 1.5 percentage points up or down.

Leftist Lula has said that Brazil should pursue its own inflation pattern, instead of replicating what he called the European model, having recently suggested a target of 4.5% as it has been in the past.

Campos Neto also dismissed calls by government economists and political allies to lower the country’s interest rate, which is currently at a six-year high of 13.75%, saying that attempts to reduce the short-term interest rate without credibility would result in a steepening of the yield curve.

He warned that strategies to control the yield curve have a “limited life,” as seen in the case of Turkey, and would force the government to finance its debt increasingly in the short term, which would be “terrible.”

Instead, Campos Neto emphasized the need to focus on improving credibility to attract foreign investment, saying that “this is not the time to think about experimenting.”

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