Weak economy is normal in a year of adjustment, says Central Bank.
The impact on Brazilian economic activity, which is expected to perform below its potential, is normal in a year of adjustment. This assessment comes from the Director of Economic Policy at the Central Bank (BC), Luiz Awazu Pereira da Silva, who also mentioned that non-economic events, such as the investigations of Operation Lava Jato, overshadow the business cycle.
Kelly Oliveira, Reporter for Agência Brasil - The impact on Brazilian economic activity, which is expected to show results below its potential, is normal in a year of adjustment. This assessment comes from the director of Economic Policy at the Central Bank (BC), Luiz Awazu Pereira da Silva, who is participating today (2), in France, in the seminar of The Economist magazine – Brazil Business Summit.
The director also mentioned that non-economic events, such as the Lava Jato Operation investigations, overshadow the business cycle.
Awazu emphasized that the return to economic growth will come with strengthened confidence. He mentioned that the government has a concessions agenda, with measures to improve physical capital (investments in infrastructure) and human capital (education).
The director defended the adjustments to the economy, with cuts in public spending and an increase in the basic interest rate, the Selic, to achieve a realignment of prices in the country. Awazu highlighted that the double adjustment of relative prices (administered and external) impacted inflation in the first half of this year, raising the accumulated 12-month result and expectations for 2015.
The Selic rate has already undergone six consecutive increases and is currently at 13,75% per year. The Central Bank uses this rate to try to contain inflation, which is expected to exceed the target ceiling for the year. The Central Bank's own projection indicates inflation this year above the target, at 9%. The inflation target for this year and 2016 is 4,5%, with an upper limit of 6,5%. For 2017, the National Monetary Council reduced the upper limit to 6%.
"The reduction in the tolerance band for the 2017 target reaffirms this commitment to the 4,5% inflation target," the director highlighted.
The rate is used in the trading of government bonds in the Special System for Settlement and Custody (Selic) and serves as a benchmark for other interest rates in the economy. By adjusting it upwards, the Central Bank contains excess demand that puts pressure on prices, because higher interest rates make credit more expensive and encourage saving. Although it helps control prices, the increase in the Selic rate harms the economy, which is going through a year of recession, with a drop in production and consumption.
"The objective of monetary policy [Selic rate hikes] is to prevent the impact of the relative price adjustment in 2015 from being transmitted to 2016," he said. Awazu added that monetary policy can and should contain second-order effects to confine them to this year.
"For this reason, monetary policy is and will remain vigilant to ensure the convergence of inflation to the 4,5% target by the end of 2016," he emphasized. He added that the Central Bank reiterates that determination and perseverance are needed in the fight against inflation. "The best contribution of monetary policy to a new and virtuous cycle of economic growth is to bring inflation to the 4,5% target by the end of 2016 and anchor expectations," the director reinforced.
Awazu also stated that the international scenario is experiencing expectations of interest rate normalization by the Federal Reserve, the American central bank. The increase in interest rates by the US central bank and the improvement in the American economy should attract more investors to that country and, consequently, lead to a global strengthening of the dollar. Awazu said that even with the best preparation and good communication from the Federal Reserve, volatility (strong fluctuations in financial markets) is possible.
Awazu also cited the moderation in commodity prices (basic products with international quotations), due to the slowdown in the Chinese economy.
The director also highlighted that the so-called Grexit, that is, Greece's exit from the eurozone and the return to the drachma currency, adds some stress. The term Grexit is formed from the English words Greece and exit.
According to the director, perceptions about Brazil are improving, with the positive effect of macroeconomic adjustment. Despite the improvement, he emphasizes that it is necessary to continue with the adjustment process.
"We have to keep the macroeconomic pillars of our house in order and stabilized for the lift-off [normalization of US interest rates]," he added.