“We can be the beautiful ones in the midst of an ugly global economy”, says BC director

The director of Monetary Policy at the Central Bank, Bruno Serra, highlighted this Monday (30) that the Brazilian economy can be a positive highlight in the world this year, when commenting on the recent upward revisions to the Gross Domestic Product (GDP) in 2022

“We can be the pretty ones in the midst of an ugly global economy. Everyone is reviewing the growth of the world downwards and Brazil upwards”, she said, in an online event by Kinea.

According to Serra, there are conjunctural and structural factors for a better performance of the Brazilian economy. In the context, he commented that he had difficulty understanding the very negative initial projections for this year’s GDP. “Credit continues to climb into double digits without slowing down yet. If credit and income are good, then there is positive demand.”

In addition, still in the conjunctural scenario, he highlighted that real interest only entered a neutral field in the third quarter of 2021 and that current activity data still respond to the interest rate at the beginning of last year, when it was on stimulating ground.

But Serra also assessed that there is a structural factor behind the better performance of the Brazilian economy: private investment. He commented that the change in the economy started in 2016, towards greater targeting of private investment, is starting to take effect.

“Brazilian investment recovered faster than our peers. Private investment is at an all-time high while the government has no capacity to invest. There are structural factors that are not well understood.”

Inflationary inertia

The Central Bank’s Monetary Policy director also highlighted that inflationary inertia “has become gigantic” when referring to the service price scenario. “Inflation in services comes from the gap in the labor market and from inertia, which has become gigantic,” he said, citing the indexation legacy of the country’s period of hyperinflation.

In this context, Serra admitted that the sacrifice of activity to control inflation has to be greater. “With an indexed economy, sacrifice of activity needs to be greater to fight inflation,” he said.

open hiatus

The director of Monetary Policy at the Central Bank also stated that the Brazilian economy should not grow above its potential, “whatever that may be”, in 2023, given the restrictive interest rate. “It’s hard to imagine a 2023 with growth above potential, interest cycles bring demand down,” he said.

He highlighted that the purpose of monetary policy is precisely to keep the output gap open for inflation to converge to the target. “If not, inflation will not fall.”

Serra also evaluated that, in his view, the Brazilian job market is not tight. “When inflation starts to fall, there may be real wage increases again.”

The BC director also stated that the consumption of goods in Brazil has already decreased, but the effect on inflation should only be observed when this happens at a global level. “Goods prices in Brazil continue to respect global pressure.”

Negative effect on growth

Bruno Serra tried to minimize an immediate correlation between a Selic rate that should exceed 13% and a strong negative effect on the growth of the Brazilian economy. According to Serra, the Selic rate is an adjustment variable and other factors may favor the expansion of the country’s GDP.

Regarding the positive factors for growth, despite the restrictive Selic, Serra mentioned the credit and competition actions of the BC# agenda. For him, a 13% Selic rate is a rate for a specific period, in which the economy needs to be deflated.

“In the Brazilian GDP growth cycle between 2004 and 2012, the average Selic was greater than 12%. Selic was around 6% before the pandemic, and activity had no growth vector. Selic rate of 13% is for a specific period in which we need to keep the gap open”, he said, adding that, after controlling inflation, interest rates should converge to the level that the BC considers neutral today, of around 7% (real by 3.5%).

Serra also commented that, for this specific period, in which inflation “in dollars” is at 8%, all Central Banks in the world need to work as a team, in which the Federal Reserve (Fed, US central bank) is the “team captain”, to bring global demand down.

“The Fed has the added challenge of impacting global assets, which emerging markets don’t. All other things being equal, the Fed will need to cycle quite long for historical standards. There are many factors and transmission channels outside the scope of the Fed, which tends to be cautious”, considered the BC director.

Source: CNN Brasil

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