In a letter to the Ministry of Economy, British Columbia indicated that interest rates will continue to rise in 2022

In a letter signed by Roberto Campos Neto, President of the Central Bank, the monetary authority of the Ministry of Economy explained the reasons for inflation higher than the target ceiling in 2021, and indicated the continuation of the monetary tightening cycle in 2022.

“Koboom [Comitê de Política Monetária] It considers that, given the increase in its forecasts and the risk of unwinding expectations for longer periods, it is appropriate that the monetary tightening cycle advance significantly into the deflationary zone,” reads the text of the letter addressed to Minister Paulo Guedes.

In 2021, Inflation as measured by the National Wide Consumer Price Index (IPCA) was 10.06%. This means that the rate was not only above the CMN’s target for the year (3.75%), but also exceeded the tolerance limit – the maximum target, which would be 5.25%.

When this happens, the head of the Central Bank of Brazil must publicly disclose the reasons for non-compliance with the goals, through an open letter to the Minister of Economy.

Among the factors that caused inflation to exceed the target ceiling, the Central Bank cites at least three reasons: the rise in prices of goods in local currency, especially goods; The hydroelectricity science of water scarcity, which came into effect last year in a period of little rain; An imbalance between supply and demand for inputs, with bottlenecks in global production chains.

The letter stated that “pressures on commodity prices and on global production chains reflect changes in consumption patterns caused by the epidemic, with a relatively greater share of demand directed to commodities and driven by expansionary policies,” referring to the stimulus measures adopted by various countries.

From the point of view of British Columbia, excess demand in relation to the short-run supply of various commodities is “aggravated by shortage of manpower, logistical problems and production bottlenecks”.

The Monetary Authority also said that the significant acceleration in the inflation rate in 2021 to levels above the target is a global phenomenon that affects most developed and emerging countries.

The Basel Accord also highlighted the impact of imported inflation on the explosion of the target price ceiling, with the strong participation of the oil escalation, goods In general, the exchange rate.

Although the contribution of the exchange rate to inflation was less than in 2020, it is worth noting the break in the historical pattern of the appreciation of the national currency during cycles of commodity price appreciation, such as what happened in
the last eighteen months.”

From a sectoral point of view, there has been a strong contribution from shocks to industrial prices, reflecting logistical problems and imbalances between global supply and demand.

asks Gustavo Cruz, economist and strategist at RB Investimentos. He believes that because of that, inflation should be higher than the target ceiling this year as well.

Inflation is also above target in 2022

Regarding measures to ensure that inflation returns to the limits set, BC stated that it “has calibrated the base interest rate, and will continue to do so, with a view to meeting the inflation targets set by the CMN. [Conselho Monetário Nacional]”.

The monetary authority acknowledged that the growth of the negative nominal trajectory was more severe than the increase in inflation expectations. “This movement signifies the transition of monetary policy from expansionary to contractionary territory (assuming a neutral real interest rate of 3.5% per annum),” the text reads.

The letter also talks about the risks of decoding inflation expectations, with questions about the future of the country’s fiscal framework, leading to higher risk premiums.

“Copom reiterates that the process of necessary reforms and adjustments in the Brazilian economy remains essential to achieve sustainable growth of the economy. Any slowdown in structural reform efforts and permanent changes in the process of adjusting public accounts may raise the structural interest rate of the economy,” the text continues.

British Columbia believes that inflation will enter a downward trajectory at the beginning of 2022, ending the year at a much lower level than it was in 2021. However, it does show that expectations are still for inflation above target this year, at 4.7%. The monetary authority is operating with an inflation forecast of 3.2% for 2023 and 2.6% in 2024.

Thus, the scenario is for inflation to converge with the relevant term goals. In this scenario, in 2022, inflation will remain above the target, although within the tolerable range, due to the inertial effects of the 2021 inflation, the letter explains.