Guru da Faria Lima shoots: “Not discussing a more realistic inflation target is bordering on ridiculous”

the government of Jair Bolsonarothrough its Minister of Economy, Paulo Guedesfailed to establish a inflation target so low. Refusing to discuss a more realistic goal “borders on the ridiculous” and only forces economic agents to live with a real interest rate very high, inhibiting investment and, by extension, growth in Brazil.

Therefore, it is necessary to break with the dogma that the inflation target, currently at 3%, is unalterable. There is also no reason for alarmism that, by raising the target, it becomes a floor and inflation gets out of control.

Nor, the tax framework should serve as an excuse to avoid this debate which, after all, would lead to a monetary policy more flexible. If the market were really worried about the lack of control of public accounts and a possible default by the new government, it would be buying the dollar and causing the exchange rate to skyrocket.

If you think the above statements came from an interview with the president Luiz Inacio Lula da Silva or your finance minister, Fernando Haddad, was mistaken. These statements were given by Rogerio Xavierone of the founders of the SPX Capital and considered one of the greatest gurus of Faria Limain an interview with Brazil Journal this week.

For Xavier, “I think there is a dogma of not discussing the inflation target, which I think is totally counterproductive and, in my opinion, generates a negative balance for the country.”

In the best journalistic fair play, see the main excerpts from Xavier’s interview with Brazil Journal. After all, when someone like him talks, it’s best to stop and listen.

On the high interest trap

“In the end, I think we carry a mistake made in 2020, when we threw the interest rate to an unrealistic level, with very high negative real interest rates, and which caused, in my opinion, a very strong breakdown in the economy , because the incentives you gave back there made the recovery of the economy, in the post-Covid period, very strong.

Just remember that the incentives that we gave in a credit form, aid to people and companies, the level of interest rates, monetary policy, in short, all those aids that were given back in 2020, along with what it was done in the rest of the world, which was, in a way, fiscal, monetary and credit policies also of unprecedented volumes in history, this whole combination generated this inflationary level that we have experienced in recent years.”

On the dogma of not discussing the fiscal target

“The interesting thing is that we were able to reverse certain dogmas, mainly in the fiscal part, and we were not able to get into the issue of monetary policy, either because of preciosity, in my opinion, on the part of the Central Bank, or because of a certain corporatism that I see in academia, that once you set your inflation target at a certain level, you cannot revise it. And, in light of the events that happened afterwards, correcting an error that I think was committed, when you set an inflationary level as low and as challenging as we set for inflation in the years ahead.

So, I think there is a dogma of not discussing the inflation target, which I think is totally counterproductive and, in my opinion, generates a negative balance for the country, you know? The Central Bank, on the one hand, pursues a goal that, in my opinion, will not be achieved. If you look at inflation expectations, the inflation projections that the market is talking about for 2024 and 2025, even 2026, they are already close to 4%.

In the last participation I made in lives, I said exactly that, that inflation expectations would approach 4%. And then what would happen? Couldn’t the Central Bank cut interest rates? So, it becomes schizophrenic, because, in the end, what the Central Bank is saying is that I will have to carry this real interest rate, at least in the horizon he is citing, from 18 to 24 months, without being able to fall the interest. That is, you are saying that you will keep the interest for two years at this level…

So, does this mean that interest rates do not fall? We are going to work with 8% and, precisely, in a context in which the international market is closed to raising corporate bonds, due to this worsening in international credit, with banks going bankrupt, so it is reasonable to assume that the market is averse to corporate risk at that time, on the external side.

And, on the domestic side, we had certain events, also on the corporate side, which also left the domestic market closed. In other words, companies that need to borrow money, either for investments or to roll over their debts, find a closed capital market, a closed international side, and with the bank internal rate with very high spreads, due to this banking crisis that we are in. seeing. So what is the option for legal entities to take cash? None.”

On the risk of a revision of the inflation target unanchoring expectations

“I think the balance would be better, because you would have more flexibility to act on monetary policy. In the end, what I am saying is the following: given that we are working with inflation around 6%… throughout the period of President Roberto Campos, the average was 6%, the inflation expectation for this year is 6%, it is difficult to see that inflation will drop from 6% to 3%… but if it drops from 6% to around 4%, I think the market does not question that much.

I find this discussion that I see on television a bit ridiculous, of economists saying “oh, no, if we change the target to 4% it will unanchor everything”… but where is anything said in that direction? We are discussing inflation projections for 2024, 2025 and 2026 at 4%.

No one is arguing that the target is going to 8% or that expectations are going to go up to 6%. Even if they go to 4.5%… I’m saying the following… I don’t defend that the target goes to 4% and the Central Bank cuts interest rates. That’s not what I’m talking about. What I’m saying is the following: pursue a more realistic goal, that you can reach that goal, that, in the projection horizon, you see some way that you can cut interest rates…”

On the risk of lack of control of public accounts

Then, you say: “Ah, but the fiscal framework…” This is a nonsense that people say to justify other issues, because, if people were really worried about the fiscal framework, they would be buying dollars. Where are the people buying dollars? The dollar has been stuck for three years at the same level. So, the argument does not gain strength in reality.

It’s reasonable for you to assume that you’re going to have a steep curve. This has it all over the world. You take longer maturities, you have a premium over shorter-term rates, because, once you believe that… the market does not set interest rates high for the short term. If you look at the rates for two, three years, they are down in relation to what the Selic rate is today. For longer maturities, you have a bias over these two-, three-year rates, which is reasonable.

So, I don’t see this tax premium that the market says. You can take LFTs… where is this tax risk premium? Because the fiscal risk appears in solvency, if you do not pay your debt, and there is nothing written in the LFT that has a premium, because the government is close to becoming insolvent. It has none of that.

So, what you have is a normal slope of the curve, in relation to the market’s expectation that, in two or three years, I believe that the interest rate movement will be done, whatever it may be, from from there, there will be a curve inclination premium, as it always has. You can take the history of the market, you will always see that the slope is positive, after you make the rate peak, and you have the expectation of two, three years ahead, that you will make an interest rate cut.

That’s very reasonable. So I, particularly, do not see this risk. And the key variable, for me, of fiscal risk… it is expressed in the exchange rate. So much so that the Central Bank itself admits this: it has no opinion on the fiscal framework. He takes as input for his model how the market will react to the announcement of the framework.

If the market, even if it doesn’t like it, imputes in its model that the exchange rate will remain at a standstill, that is what will enter the Central Bank’s model. There is no such variable… it can enter as demand, because if we are putting more demand in the economy, but if you look at the forecasted primary deficit for this year… for example, we have a primary deficit of around 0, 5% of GDP… is close to zero.

The market is not that different. The Treasury Secretary himself recently said that the market has a figure of around R$ 100 billion, a little less than 1% of GDP as well. So, that’s not it… what surprises me are the big numbers. We are talking about a primary deficit of around 1%, moving towards equilibrium next year, and inflation itself, in the market’s expectations, we are talking about 4%.

We’re not talking about anything out of the ordinary. Honestly, for us, who look at inflation around the world, this discussion is bordering on ridiculous. We are talking… in yesterday’s Fed projection, we are saying that the Fed will target an inflation of 3.1%, and it will only reach 2% in 2025.