The energy crisis is an extremely relevant element for the Brazilian economic scenario, evaluated the economists who participated today in the VII Annual Seminar on Monetary Policy, promoted by the Brazilian Institute of Economy (FGV-IBre) and the newspaper Value.
Former Central Bank president Affonso Celso Pastore believes that a possible shock in the supply of electricity could lead the monetary authority to raise interest rates even more. “The question is whether this crisis will generate rationing and cause a supply shock.”
The opinion is shared by Itaú Unibanco’s chief economist, Mário Mesquita: “The shock in the supply of energy may postpone the conversion of inflation expectations to the target”, he said. For Mesquita, the energy crisis is more of an inflationary risk than a limiting factor for economic activity.
Mesquita also highlighted that Brazil is dealing with an inflationary process that has changed in recent times. “It started out led by the exchange rate and commodities, but now inflation is starting to show up more clearly in the prices of services, which is that more persistent inflation with inertial characteristics,” he said.
For Pastore, this is a consequence of the beginning of vaccination against covid-19 in the country. “The pandemic is slowly being dominated and the services sector will grow more and will generate the inertia component, which is rising”, he commented, adding: “We have to move soon with this monetary adjustment to avoid it becoming more complicated.”
José Júlio Senna, former BC director and director of the Center for Monetary Studies at IbreFGV, pointed out, in turn, that political noise and fiscal risks are affecting inflation expectations. According to him, “the government has to be involved in fighting inflation, and not just the BC”, contributing to lower the boil in politics and reduce fiscal risks. Senna recalled, for example, that the issue of court orders has not been resolved.
He also pointed out that “inflationary shocks can last longer and dampen expectations. “The longer inflation remains high as it is, the worse for the formation of expectations,” he said, noting that “the influence of past inflation on the formation of expectations is still important.”
Pastore assessed that 2022 “will be an extremely complicated year in the political, economic and fiscal field”, with GDP growth below potential. He pointed out the worsening of the institutional crisis as a factor that tends to pressure the economic scenario. “We have a politically weak government, which is creating a climate of crisis,” he said.
Mesquita added that, in his assessment, controlling inflation will be a huge challenge for the Central Bank. “The BC is dealing with a situation that I have rarely seen in terms of difficulty,” he commented, citing other factors that pressure inflation. “Formal employment, for example, has already recovered losses caused by the pandemic. The collective bargaining agreements are following inflation and there is an inflationary risk in that”, quoted Mesquita.
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