BC sees the water crisis more as a price problem than a rationing problem, says Campos Neto – 09/03/2021 – Market

The Central Bank sees the water crisis more as a matter of prices than of rationing, said this Friday (3) the president of the municipality, Roberto Campos Neto. He acknowledged that the higher tariff flag has a strong impact on inflation and that, therefore, the BC is following this evolution “in detail”.

Speaking at the Estadão Finanças Mais event, he also indicated that the BC will soon open its view on the output gap, understanding that this may explain the difference between the inflation calculations for 2022 seen by the BC and by the market.

Regarding the water crisis, Campos Neto pointed out that the various red flag readjustments and the implementation of the last flag, associated with the water crisis, “really impact a lot” on inflation, as electricity prices spread throughout the production chains. Therefore, he reinforced that the BC has been watching this movement closely.

“We will monitor, it is very important to monitor this water part in the coming months. Remembering that we still understand that it is more a price issue than rationing because, if we have rain, even if it is a little below average, it is still thus the reservoirs are above 10%,” he said.

“So this does not imply rationing. But it is important to follow in detail what will happen with this next season,” he added, noting that this is a “very serious” problem for the coming months.

According to Campos Neto, the incorporation of this effect of electricity prices has affected the increase in inflation expectations for this year, also influencing “a little” expectations for 2022.

He said again that, in BC’s accounts, the IPCA for next year is lower than what is seen by the market. The BC president also acknowledged that this distance of views has increased, being the object of study by the BC.

While the monetary authority predicted a 3.5% increase for the IPCA next year, exactly at the center of the target, economic agents have successively raised their estimates, which are now at 3.95%, according to the most recent Focus Bulletin.

Campos Neto pondered that there is a great challenge in carrying out monetary policy in a regime of uncertainty, noting that in Brazil there was a “water crisis on top of all the shocks”. He stressed that some of these shocks are supply shocks and disruptions in chains, with most of them being global, making it more difficult, therefore, to predict their normalization.

“It is more difficult in this regime of uncertainties, we have to look at our balance of risks more carefully. In addition, we have an electoral process, which has a natural noise coming from this process, which many other countries do not have,” he said .

He pointed out that, despite the difficulties, the BC’s mission is to deliver the inflation target and the monetary authority is committed to that.

“We understand that we have the instruments to make inflation converge to the target in the relevant horizon and the Central Bank will do whatever is necessary,” he said.

In his participation, Campos Neto indicated that the BC will be more transparent in relation to the modeling that it considers in its calculations for the output gap so that the market understands its operations.

The gap, which is the difference between the potential GDP and the actual growth of the economy, is considered a key concept in the conduct of monetary policy, as it indicates whether the economy is growing above its potential or not.

According to the BC president, the Quarterly Inflation Report, which will be published by the BC at the end of this month, will show how the autarchy is seeing the hiatus closing and expectations in this regard ahead.

“Maybe this explains a little the difference between what the Central Bank has found in terms of inflation and what the market thinks and we will start to be more and more transparent in our modeling so that the market understands why we take the our measurements, why we do things the way we do, what is the purpose of the measurements,” he said.