Central Financial institution sees upward strain on inflation for ‘momentary revenue help insurance policies’

The Auxílio Brasil in the amount of R$ 600 began to be paid this Tuesday

O Central Bank (BC) assesses that the extension of “temporary income support policies” push inflation up and make it difficult to analyze the impacts of the upward trend in the basic interest rate, the Selic, on prices. The assessment is contained in the minutes of the Monetary Policy Committee (Copom) meeting released this Tuesday, at a time when the government is expanding spending to try to boost the president’s popularity. Jair Bolsonaro.

The Aid Brasil in the amount of R$ 600 began to be paid this Tuesday after the promulgation of the Electoral PEC that made it possible to increase the benefit by R$ 200 monthly until the end of the year, in addition to other electoral expenses. Specialists criticize the PEC for circumventing fiscal, electoral and even constitutional precepts, creating an emergency situation considered non-existent.

In the BC’s assessment, measures that stimulate demand can affect inflation through activity, prices and market inflation expectations. The minutes also point out that, if prolonged, these policies worsen the country’s fiscal trajectory.

“The Committee assesses that temporary income support policies should stimulate aggregate demand and that the prolongation of such policies could raise country risk premiums and inflation expectations as they put pressure on aggregate demand and worsen the fiscal trajectory” , points to the minutes.

For Débora Nogueira, chief economist at Tenax Capital, the message from the Central Bank refers to both the PEC and the project that limits ICMS on fuel and electricity.

— We could think that considering the monetary policy lags, now at the end of this second semester would be the moment that would have the peak of the effect on inflation, but this will be balanced by the more expansionary fiscal — he pointed out.

Part of the effect can also be seen in the cycle of increases in the Selic that started in March 2021, when it was at 2% per year, and reached 13.75% in the last week.

According to Copom, the upward cycle was “quite intense and timely”, but a large part of the effect on interest rates cannot yet be observed in inflation rates, partly due to fiscal policy.

“These impacts should be clearer in the activity indicators for the second semester, but the Committee anticipates that measures to sustain aggregate demand, which will be implemented in the short term, should make it difficult to make a more accurate assessment of the stage of the economic cycle and the impacts of monetary policy”, says the minutes.

In addition to the fiscal, another point that pressures inflation according to the Copom is the still strong economic activity, including the stronger numbers of the job market. The Committee expects a slowdown in activity.

“Both the indicators referring to the hiring of formal employment and the occupancy and unemployment rates suggest a rapid normalization of labor-intensive sectors after the pandemic”, he points out.

international effect

The minutes of the Copom meeting also showed the BC’s concern with changes in the international economic scenario. The Committee sees slower growth in activity in major economies due to the upward trajectory of interest rates worldwide, in addition to more uncertainty in Europe due to the war in Ukraine and negative impacts on growth prospects in China.

The assessment is that inflation rates show a beginning of normalization of supply chains and “accommodation” of prices of the main commodities.

“Allied to the rebuilding of inventories of industrialized products, these developments may imply a moderation in inflationary pressures linked to goods. On the other hand, the degree of idleness in the labor market in these economies suggests that inflationary pressures in the service sector may take time to dissipate”, the minutes show.

According to Copom, there is a faster pace in the process of raising interest rates in advanced economies and this has increased the probability of a “more pronounced” slowdown in the world economy.

“In this sense, uncertainty about the energy scenario in Europe, the dynamics of sectors that are more sensitive to interest rates in the United States and the prospects of more gradual growth in China contribute to this”, he says.

Nogueira, from Tenax Capital, emphasizes that the external scenario should help the BC in the task of reducing inflation.

“From what the Central Bank comments on the surprises of a slowdown in global activity, there is more tightening abroad, weaker activity, sort of offsetting the expansionary fiscal in the second half,” he said.

Source: O Globo Agency