Arminio takes a stand against changing the inflation targeting system

247 – Economist Arminio Fraga, former head of the Central Bank, has expressed his opposition to a possible change in the inflation targeting system. in Interview with Folha de S. PaoloHe warned that any change in the objectives during the next meeting of the National Monetary Council would be disastrous. Fraga argues that the 3% target should be maintained as a permanent target for the monetary authority.

According to Fraga, Brazil is progressing toward its inflation target, even with some sacrifices, and it would be unwise to squander that progress. He stressed that the stability achieved so far must not be compromised. The economist argues that the benefits arising from replacing the calendar year with the continuous goals model will be limited and will serve only to align monetary policy currently approved by the central bank.

Fraga points out that the extinction of the open trade, which is required when general inflation ends outside the specified range, will not entail significant losses. He finds that the Central Bank has already held accountable for its performance throughout the year on several occasions, such as in Monetary Policy Committee (Copom) meetings and in inflation reports, in addition to the obligatory visits of the BC Chairman. to Congress.

When asked about the 3% target starting in 2024, Fraga expressed support for maintaining it and highlighted that expectations have converged to that level. It is noted that the central bank has already expressed concern about the coming year and the possibility of a longer convergence path. Therefore, he sees no reason to change the target.

Faraga also rejects the idea that a possible change in the tolerance period would be beneficial. He explains that the function of this time period is to indicate how much deviation from the target the community is willing to tolerate. Changing the tolerance range would send a negative signal, indicating that society accepts more short-term inflation at the expense of economic activity. The economist warns that President Lula and other members of the government are wrong to think that changing the inflation target can lower interest rates.

Follow up on recommendations

Fraga highlights the damage a change in purpose can bring, including increased uncertainty. He stressed that maintaining the goal would be an important achievement for the country, especially in a context where financial responsibility has been abandoned. The economist points out that Brazil is still moving towards the goal, even with the challenges it faces, and this should not be wasted.

In terms of replacing the calendar year with an ongoing goal, Fraga sees the benefits as going to be modest. He believes the main advantage will be in setting the 3% as a permanent target. Faraga points out that the annual inflation is not very important from a practical point of view and that the central bank is already working taking into account the horizon of monetary policy measures, looking to the future.

Regarding the deadline for verifying compliance with the target, Faraga says that the central bank must determine whether the shock is supply or demand, temporary or permanent, and what is its size. He notes that there is no set deadline and that the central bank needs to mitigate the impact of shocks, while keeping inflation expectations steady.

Fraga believes that setting the date for this verification should be left in the hands of the central bank, which is already aware of this problem. It highlights the importance of working BC carefully, avoiding overpromising. The economist concludes by saying that sustainable economic growth depends on investments, productivity, technology and structural reforms, and that the central bank cannot be held responsible for promoting economic growth in isolation.

Arminio Fraga is an economist who graduated from PUC-Rio and holds a PhD from Princeton University. Currently, he is a founding partner of the management company Gávea Investimentos and is also involved in the institutes’ activities focused on health policies and social development.