The inflation target in Brazil, defined annually, must not be reduced below 3%. That would be enough, and less can even be harmful. This is the assessment of economists interviewed by the UOL. The CMN (National Monetary Council) defines this IPCA target (the “official” price index), and there will be a meeting in June. According to these experts, the trend is to stop reducing the target, which had been falling for years.
The perception is that the 3% established for 2024 is already low enough and will be repeated in the following year. Specialists believe that, since the inflation targeting system was adopted in 1999, Brazil finally has an IPCA objective compatible with those of other emerging countries. A lower target would end up hurting the economy because interest rates would have to be higher, which affects consumption, production and employment.
Comprised of the Minister of Economy, Paulo Guedes, the Special Secretary for the Treasury and Budget, Esteves Colnago, and the President of the Central Bank, Roberto Campos Neto, the CMN is the government body responsible for setting inflation targets. Once the target has been established for each year, it is up to the BC to meet the target.
Thus, when inflation is very high, as it is now, the agency raises the Selic (the economy’s basic interest rate). When prices don’t go up that much, the BC can cut interest rates. Currently, the Selic is at 11.75%, while the IPCA in 12 months up to March is at 11.30%.
What are the current inflation targets?
This dynamic has existed since 1999, when the inflation targeting regime was established in the government of Fernando Henrique Cardoso. Since then, the CMN has gradually reduced the target —which started at 8% in 1999— to bring Brazilian inflation to levels similar to those of emerging economies that are economically balanced.
In June, the CMN meets to confirm the goals for the next two years and to define the objective for three years later. In addition to setting the target, the council defines a “band” — which is a kind of fluctuation margin, up or down, that inflation can have.
In the case of 2022, for example, the established target is 3.5%, but the margin is 1.5 percentage points more or less. This means that the target will be met by the BC if inflation stays between 2% and 5%. The current parameters are as follows:
- 2022: 3.5% (1.5 percentage point margin)
- 2023: 3.25% (1.5 percentage point margin)
- 2024: 3% (1.5 percentage point margin)
Is it time to stop?
Since 2019, the CMN has been reducing the annual inflation target by 0.25 percentage points. For economists heard by the UOLhowever, it may be time to stop.
This is the view of economist Mauro Schneider, from MCM Consultores.
What should lead the BC to maintain the 3% target in 2025 is the idea that existed, back then, since the target system was created, of using this dynamic to make inflation in Brazil converge towards the average rate from emerging countries. I believe that this idea remains valid and that the CMN will maintain the 3%.
Mauro Schneider, economist at MCM
The chief economist at Greenbay Investimentos, Flávio Serrano, also believes in the interruption of the target cuts. For him, the CMN tends to keep the 2025 inflation target at 3%.
We believe that the CMN will now continue with the 3% inflation target. This is because this is the average level of inflation in emerging countries.
Flávio Serrano, chief economist at Greenbay
Cost for even lower target would be high, economist says
The chief economist at C6 Bank, Felipe Salles, says that the most likely is that the CMN will, in fact, maintain the target at 3% in 2025.
“When we look at other countries, we see that the most developed have a target of around 2% and the emerging ones, around 3%. The target of 4.5% we had back then was not very much in line with what was see in emerging countries”, he says.
From 2005 to 2018, the CMN maintained the inflation target pursued by the BC at 4.5% – above the targets of emerging countries. After that, the dynamics of cuts of 0.25 percentage point each year were established, until reaching the 3% target for 2024. Going beyond that, in Salles’ view, would have a cost for the country.
Bringing inflation down comes at a cost. The Central Bank would have to be more rigid in terms of interest rates and economic growth. When the target was at 4.5%, there was a great benefit to start lowering, because the reference in Brazil was great in relation to countries similar to ours. Today, we already have inflation closer to that of emerging markets.
Felipe Salles, chief economist at C6 Bank
In practice, by setting a target below 3%, the CMN could force the BC to maintain the Selic at higher levels – which would represent a small gain in terms of price controls and, on the other hand, would punish economic activity. That’s because higher interest rates mean less credit, less investments and, ultimately, fewer jobs.
Need to control inflation
In 2021, with the covid-19 pandemic, Brazilian inflation stood at 10.06%, well above the target of 3.75%. In 2022, still under the effects of the pandemic and with the war between Russia and Ukraine, the tendency is that, again, inflation will be above the objective pursued by the BC.
For the economists interviewed by the report, however, the fact that the IPCA is above the target for two years does not mean that the country should establish, as a goal, higher inflation.
“On the contrary. We will only have low inflation if we pursue low inflation”, defends Flávio Serrano, from Greenbay Investimentos.
Salles, from C6 Bank, follows the same reasoning. “One of the reasons why we had a little difficulty controlling inflation is because we live with a high target. The decision back there, to lower the target from 4.5% to 3%, was correct”, he defends.
THE UOL asked the Central Bank to comment on inflation targets. The body was asked about its vision for the target after 2024 and whether there would be an inflation considered ideal for an emerging country like Brazil. The BC said it would not comment.