Written by Peter Frontini and Marcella Ayres
SAO PAULO/BRASILIA (Reuters) – Brazilian President Luiz Inacio Lula da Silva signed a decree on Wednesday setting a continuous inflation target starting in 2025, with quarterly accountability by the central bank.
The decree gives the National Monetary Board, the country’s top economic policy body, the authority to set the target. At a later meeting on Wednesday, CMN confirmed the official target of 3%, with a tolerance band of plus or minus 1.5 percentage points.
The decision follows strong criticism from the leftist Lula over the target level last year, arguing that it was too low and required restrictive monetary policy, thus holding back the economy.
However, in June 2023, his government announced that the 3% target would be continued, although the formalization of the new system was awaiting presidential decree.
When asked whether the move strengthens Lula’s support for the goal and could help lower rising inflation expectations, Finance Minister Fernando Haddad said it was necessary to pay attention to government decisions, not discussions, stressing that Lula’s commitment to this issue was clear last year.
Haddad, a member of the Policy Matrix Network alongside the planning minister and central bank governor, told reporters that the new system effectively frees the government from setting the official annual target and, along with the government’s fiscal rules, “establishes a new macroeconomic system.” Horizon for Brazil.
To date, CMN has set annual inflation targets to achieve each calendar year.
But Lula’s economic team argues that pursuing inflation targets within a sustained time frame allows for a longer-term approach that provides more room to absorb price shocks without the need to tighten monetary policy.
According to the decree, starting from January, the target will be considered missed if annual inflation for six consecutive months deviates from the range of the relevant tolerance period.
In such cases, the Central Bank will issue an open letter to the Minister of Finance explaining the reasons, the measures needed to bring inflation back to target, and the expected timeline for their effectiveness.
The decree also mandates the central bank to begin publishing a quarterly report on monetary policy, “which will include the performance of the new inflation target framework, the results of previous monetary policy decisions, and the future assessment of inflation.”
The change in the time frame for assessing the extent to which the inflation target was achieved was announced a year ago, but was contingent on a presidential decree.
The Ministry of Finance said, in a statement, that the new system allows inflation expectations to be stabilized over longer horizons, adding that it shows the country’s commitment to low and steady inflation.
Now, any changes to the target must be announced at least 36 months in advance.
When asked earlier on Wednesday whether central bank monetary policy chief Gabriel Gallipolo would be chosen to head the central bank once Roberto Campos Neto’s term as governor ends in December, Lula said he was not yet focused on the matter.
Now in his third non-consecutive term, Lula said the independence of the central bank had always been respected in his previous administrations, but he repeated his criticism of the current benchmark interest rate of 10.5% given the 4% annual inflation rate.