(Bloomberg) — Brazil is changing its inflation targeting regime to set a goal for continuous periods of time instead of a calendar year, a move analysts expect to reduce political noise for the central bank.
Starting in Jan. 2025, the bank will follow a continuous horizon guided by a 12-month consumer price index to be published monthly, according to an official decree issued Wednesday by President Luiz Inacio Lula da Silva. Six consecutive months outside the target range will be considered a failure to meet the goal, and require the bank’s governor to write a public letter and a note in an official report explaining why the target was missed.
The official goal, its tolerance range and the index that guides them will continue to be set by the country’s national monetary council, a body made up of the finance minister, planning minister and central bank governor.
But unlike now, any changes to those measures will have to be announced at least 36 months in advance, limiting the government’s ability to affect current monetary policy.
“It’s a positive confirmation of what was expected,” said Helena Veronese, chief economist at asset manager B.Side Investimentos.
The change may lead to improvement in future inflation expectations that remain at least a half-point above target as investors also react to the bank’s unanimous decision to halt rate cuts last week, she said.
What Bloomberg Economics Says
The president exerts indirect influence on monetary policy through the inflation target, which is set by the CMN — comprising the ministers of finance and planning and the BCB governor. Wednesday’s decree limits that influence as a change in the target wouldn’t have an immediate impact on rate decisions.
— Adriana Dupita, Brazil and Argentina economist.
Since its creation in 1999, Brazil’s inflation-targeting regime has worked under a calendar year, with central bankers held accountable each December. The monetary authority has failed to deliver on its goal seven times, two of them under current chief Roberto Campos Neto.
Still, the bank’s policy decisions are taken with a larger time horizon in mind. Central bankers currently consider up to 18 months in advance, taking into account lags for the impact of interest rate decisions on the economy.
Finance Minister Fernando Haddad previously announced that Brazil would adopt the new method last year, but a decree was still needed for it to take effect. He met with Lula to discuss the changes Tuesday afternoon, together with Gabriel Galipolo, the bank’s director of monetary policy who is widely considered a potential successor to Campos Neto.
The central bank’s current inflation report will continue to be published quarterly, although it will now be called the monetary policy report, the bank said after Lula issued the decree.
(Updates with more details from decree, analyst reactions from third paragraph)
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Published: 26 Jun 2024, 11:06 PM IST