Economist points to "inflationary terrorism"

247 - Economist Amir Khair does not believe that raising the benchmark interest rate at this time is ideal. After all, as the Central Bank itself reports, increasing the Selic rate would take six to nine months to take effect, while analysts indicate a drop in inflation in the next two months. According to him, "there are no technical reasons" to raise the Selic rate now, and the pressure on the Copom (Monetary Policy Committee) "seems to have a political bias."

Read below his article published this Monday in the newspaper O Estado de S.Paulo:

Inflationary terrorism

With March's inflation result of 0,47%, what analysts and the government already knew occurred: the 6,50% target ceiling would be breached. In the last 12 months ending in March, the IPCA (Brazilian consumer price index) registered 6,59%. What stands out are the sharp price increases in fresh food (vegetables, fruits, etc.).

This is generating strong pressure from the financial market on the Monetary Policy Committee (Copom) to raise the Selic rate, in yet another attempt to recover profits from the good times of the abundant Selic rate. The question is: should Copom raise the Selic rate to combat inflation? I don't think so.

As is well known, the Central Bank (BC) has always stated that any change in the Selic rate takes 6 to 9 months to take effect, and forecasts from experienced analysts indicate a drop in inflation in the next two months. From then on, the forecasts tend to fail.

Therefore, any hasty move to raise the Selic rate undermines the "caution" recommended at the last Copom meeting. Most analysts already admit that the increase will not happen now, at the meeting on April 17th, but some still believe it will occur on May 29th, at the next Copom meeting. I don't think so.

There are no technical reasons to raise the Selic rate, and even if it were raised by one or two points, it would not alter growth or inflation in any way, much less the price of fresh food. It is worth noting that inflationary expectations are technically driven by short-term inflation, and this has been declining since the beginning of the year.

What is expected in the coming months, therefore, is a return of the IPCA (Brazilian consumer price index) to below the upper limit of the target.

Central banks around the world. Since December, no central bank in the world has raised the benchmark interest rate, and eight have lowered it, as the decision is to address the impact of the crisis, which has cooled growth. Furthermore, central bank policy is to position the rate at the level of inflation, which on average in emerging markets is close to 5% per year. In the case of developed countries, this rate has been lower than inflation.

By all indications, this pressure seems to have a political bias, as journalist José Paulo Kupfer pointed out (Estadão, 11/4, B4) in the article "Price cools down, but interest rate decision takes on a political bias." The price of tomatoes is being used as a symbol for this.

The political issue is marked by what the opposition to the government would gain from the argument that the president used her voluntarism to reduce the Selic rate and look what happened: it increased inflation. This argument does not hold up to the facts, since half of the inflation is due to food that suffered an international supply shock, which is progressively dissipating. The agricultural commodities index fell from a high of 155 at the end of July to 121 on the 9th of this month.

In reality, what the financial market seems to want is a return to the old days of double-digit Selic rates. It's worth remembering that, during the last few terms of the Central Bank presidents, the Selic rate fell from 23,8% (Gustavo Franco, 1996 to 1998) to 19,8% (Armínio Fraga, 1999 to 2002), 14,9% (Henrique Meirelles, 2003 to 2010), and, during Alexandre Tombini's tenure, it fell from 11,8% in 2011 to 8,6% in 2012 and 7,25% this year.

Growth. I don't believe that changes in the Selic rate will influence growth. What influences it is the interest rate for borrowers, and this is much higher and not statistically affected by the Selic rate.

The signs of weak economic activity are clear: 1) industry almost stagnant; 2) credit losing strength; 3) labor market slowing down; 4) retail sales volume stable since October; and 5) international crisis plunging Europe into recession, with Germany, the eurozone's engine, suffering a growth forecast of 0,3% and Japan stagnant for some time.

Perspectives. The consequence of the international impact is a continued fall in commodities and international prices. The world is disinflating. The drop in prices of fresh food has already begun, as supply is now growing and firm both in Brazil and in the main producing countries. The Central Bank is monitoring this and considers it important when making its decision.

Combating inflation. The immediate way to combat inflation is through tax breaks, which have reduced electricity tariffs and the prices of basic goods, and by keeping fuel prices down, at the expense of Petrobras. The fact is that the government will continue these tax breaks and, with that, will keep inflation from exceeding the upper limit of the target. There is a noticeable shift in responsibility for inflation control from the Central Bank to the economic team (Finance Ministry and Central Bank), coordinated by the president.

Now is the time to step on the gas pedal, reducing basic interest rates and, above all, interest rates for borrowers, reducing taxes on popular consumer goods, depreciating the exchange rate, which is completely out of place, and expanding income policies.

The government must not fall into the trap of 2011, when inflationary terrorism generated macroprudential measures that stifled growth. The government needs firmness to confront what resembles a new edition of that terrorism.