Lula Cements Brazil Central Bank’s Switch to Continuous CPI Target

(Bloomberg) -- Brazil is changing its inflation targeting regime and setting a 3% goal for continuous periods of time instead of a calendar year, a move analysts expect to reduce political noise for the central bank.

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Starting in Jan. 2025, the bank will follow a continuous horizon guided by the country’s 12-month main consumer price index, according to an official decree issued Wednesday by President Luiz Inacio Lula da Silva. Six consecutive months outside the target range will be considered a failure to meet the goal, and require the bank’s governor to write a public letter and a note in an official report explaining why the target was missed.

The bank’s current 3% goal with a tolerance range of plus or minus 1.5 percentage points will be maintained, Finance Minister Fernando Haddad said Wednesday afternoon, after the decree was published. The regime will continue to be guided by the amplified index of consumer prices known as IPCA.

Brazil’s targeting regime is now “absolutely solidified,” Haddad told reporters in Brasilia. “Inflation is well behaved, with price pressures likely to remain below 4.5%,” he added, saying the monetary authority remains committed to its goal.

Haddad’s comments followed a meeting of the country’s national monetary council, which is made up of the finance minister, central bank chief Roberto Campos Neto and Planning Minister Simone Tebet. The body will remain in charge of setting all key measures guiding the regime.

“Our goal is now continuous and we don’t have to set a new one every year,” Haddad said.

Traditionally, the economic team would either announce or ratify the country’s inflation goal every June. Now, changes will have to be announced at least 36 months in advance, limiting the government’s ability to affect current monetary policy.

“It’s a positive confirmation of what was expected,” said Helena Veronese, chief economist at asset manager B.Side Investimentos.

The change may lead to improvement in future inflation expectations that remain at least a half-point above target as investors also react to the bank’s unanimous decision to halt rate cuts last week, she said.

What Bloomberg Economics Says

The president exerts indirect influence on monetary policy through the inflation target, which is set by the CMN — comprising the ministers of finance and planning and the BCB governor. Wednesday’s decree limits that influence as a change in the target wouldn’t have an immediate impact on rate decisions.

— Adriana Dupita, Brazil and Argentina economist.

Since its creation in 1999, Brazil’s inflation-targeting regime has worked under a calendar year, with central bankers held accountable each December. The monetary authority has failed to deliver on its goal seven times, two of them under Campos Neto.

Still, the bank’s policy decisions are taken with a larger time horizon in mind. Central bankers currently consider up to 18 months in advance, taking into account lags for the impact of interest rate decisions on the economy.

Haddad initially announced that Brazil would adopt the new method last year, but a decree was still needed for it to take effect. He met this week with Lula to discuss a specific point of the decree, he explained on Wednesday. Gabriel Galipolo, the bank’s director of monetary policy who is widely considered a potential successor to Campos Neto, also participated in the meeting because he led negotiations inside the monetary authority, Haddad said.

The finance chief stressed that Lula, who has often called for a higher inflation goal, is in agreement with all the changes.

“We are all convinced this is the best solution for the country,” he said.

The central bank’s current inflation report will continue to be published quarterly, although it will now be called the monetary policy report, the bank said after Lula issued the decree.

(Updates with maintenance of 3% target and comments from finance minister from third paragraph.)

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