“Inflation above the target has created confusion,” says Brazilian main Banker
Expectations are still outside the target midpoint, which causes inflationary pressures to create disputed between market participants.
Inflation expectations above target for a long time ‘create a lighthouse pointing in the wrong direction,’ says central bank director.
“When the level of future inflation expectations remains unanchored for a significant period, ‘it creates a lighthouse pointing in the wrong direction,'” said Diogo Guillen, the economic policy director of the Central Bank, during an event at Goldman Sachs in São Paulo.
Guillen also stated that there is consensus among countries regarding the beginning of an interest rate cut cycle. He mentioned that “in the global scenario, we have seen a two-stage inflation, a first stage where the speed [of price decline] was higher and a second moment of ‘last mile,’ more difficult and linked to the output gap.”
Guillen questioned: “Will it be able to hit the pot of gold at the end of the rainbow?” However, the expert assessed that there is “a growth scenario that does not decelerate much and, at the same time, there have been disinflation processes, with a story of consumption resilience.”
According to the official, this inverted lighthouse “perpetuates itself through salary indexation and affects price setting.”
Guillen drew attention to the fact that expectations for the IPCA, the official inflation index, reported in the Focus survey, have shown a decline for 2024, with an expected inflation level of 3.76%. However, “for the remaining periods, it has been unanchored [above the target midpoint] at 3.5% for a few weeks.”
Looking at the external scenario, Guillen stated that “inflation expectations, in general, are decreasing when looking at more distant horizons.” According to him, in some countries like Brazil, expectations are still outside the target midpoint, but there are others where convergence is already seen with a process of expectations realignment. The director also emphasized that there is a significant correlation of themes among countries in the disinflationary process.
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