Alexandre SchwartsmanFormer director of the BC and consultant at AC Pastore
Former director of central bankthe Economist Alexandre Schwartsman evaluates as appropriate the path adopted by the Monetary Policy Committee of reducing the pace of cutting the basic interest rate (Selic) given the context of the worsening international and local scenario. He considers, however, that the division of votes within the Copom needs to be explained.
“If it is a deeper disagreement, then the problem is the signaling that remains for 2025 onwards, because we have a Central Bank that will forge a majority that will be much more dovishmuch less committed to the convergence of inflation (to the goal),” says Schwartsman, also a consultant at AC Pastore.
At decision that reduced the pace of Selic cuts to 0.25 percentage pointsall directors who were appointed by the Lula government voted for a greater reduction, of 0.5 percentage points, as had been practiced by the BC until then.
“If there is agreement on the diagnosis, and it is a bad diagnosis, why in the end did they choose to vote by 0.5? And then we will have to wait and see if there is any justification, if it is a one-off issue or if there is a deeper disagreement about the direction of monetary policy,” he says.
This weekend, Schwartsman debuts as a columnist for Estadão. Your texts will be published on the portal on Saturdays and in the printed newspaper on Sundays, every two weeks. Below are the main excerpts from the interview.
Like mr. evaluate the Copom’s decision and the division that was marked between the directors?
The decision seemed appropriate to me, but the reaction has not been good. When I say that the decision is appropriate, what is in the statement – and apparently there is even a certain consensus within the committee – is that there was a considerable change of scenery. Not only with regard to the international scene, but also domestically.
Could you elaborate on this change of scenery?
The international scenario is reasonably well known and I dare say consensual. There is American inflation that is taking longer to fall and has implied a change in what was imagined would be the beginning and the extension of the interest rate reduction cycle in the United States. At the beginning of the year, it was assumed that it would start in March, then it went to June and, now, it is scheduled for September – and sub judice. It will depend a lot on how the job market there behaves. The fact is that there has been a big change. We are working with higher interest rates and a stronger dollar globally and locally. This has some impact on inflation.
And the local scene?
The most radical change in the committee’s vision concerns the domestic scenario. And in some dimensions. The first is about activity. Until March, the scenario that Copom worked on was one of some slowdown in economic activity. Now, the comment they make is that activity and the job market have shown greater dynamism than expected. It has a vision of a stronger economy and, presumably, it is something that makes the fall in inflation slower going forward.
What other changes did you make? would you point?
There is a second important change regarding the tax issue. And they were quite tough, in the current context, with regard to the changes in fiscal policy that result from the sending of the Budget Guidelines Bill (PLDO) for 2025 and the signaling for the following years. There was a general reduction in the trajectory of primary results. There was a considerable worsening of the primary result targets and all indications are that it will be very difficult to meet the public spending trajectory that is embedded in the LDO projections.
Even with total spending growing at the rate allowed by the fiscal framework, the increase in mandatory spending crushes discretionary spending, including in an election year. Which means that – most likely – they will have to keep their mouth open when it comes to spending trends as well. Spending must exceed the limits set by the fiscal framework. It’s getting worse, and I think the Central Bank drew attention. But there is a third worsening, partly a consequence of these first two, in particular the second, which is a further deterioration of expectations. The Copom spoke of expectations that were only partially anchored. Now, he talks about being completely unmoored – and they will be more.
Is this context that helps explain the cut?
It was not possible to maintain (the rate of interest cuts). The scenario was different, and the Central Bank always emphasized the issue that the commitment to cutting interest rates was conditional. Conditions changed, and he changed the interest rate cut. What’s more: even going forward, he signaled that he is not committed to the interest rate trajectory, he is committed to the convergence of inflation.
And the division of votes among directors?
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It is understood that the statement is the motivation of the majority, it does not explain why some people ended up choosing to vote for a different trajectory. But that said, particularly with regard to diagnosis, the committee was unanimous. Therefore, it is a unanimous assessment that the uncertain global scenario and the domestic scenario marked by resilience in activity and unanchored expectations demand greater caution. And it’s exactly the root of the reason to slow down (the cut). It is unclear what the reason was for voting by 50 points. If there is agreement on the diagnosis, and it is a bad diagnosis, why did they ultimately choose to vote by 0.5? And then we will have to wait and see if there is any justification, if it is a one-off issue or if there is a deeper disagreement about the direction of monetary policy.
If it is a specific issue, the committee is probably capable of returning to unanimity from now on and in the future. If it is a deeper disagreement, then the problem is the signaling that remains for 2025 onwards, because we have a Central Bank that will forge a majority that will be much more dovish, much less committed to inflation convergence. And that’s what we’re seeing today (Thursday). You can even bring down the short interest rate, but the long interest rate will rise, inflation expectations will rise, and risk premiums will rise, and the dollar will become more expensive. I mean, it’s a dream scenario, only in reverse. It’s a nightmare scenario.
And the economy grows less…
The consequence of this whole joke is that the economy grows less. Long interest is much more relevant than short interest when it comes to determining economic activity. And a more expensive dollar also ends up working against it. It’s not a nice scenario. This division of the Committee, if not very well explained, has potentially negative consequences for inflation and growth via long interest rates and via the dollar.
Copom division needs to be clear in the minutes, says Schwartsman Photograph: Gabriela Bilo/Estadão
Should the reasons for this division be clearer in the minutes or, possibly, only in the next Copom decision?
I would like it to be clearer in the minutes. If it is not clear in the minutes, it is a sign that it is deeper. I think we won’t have to wait for the next meeting. If the minutes state that the (directors) who voted by 0.5 points agree with all of this (the diagnosis), so it is a different view of posture. It’s going to be bad.
And how far can the BC go in cutting interest rates?
We are working with 10%. In other words, two more cuts (from 0.25 points). Obviously, in 2025 it’s a different board, a different game. Then we see. You can look for a lower number.
And what about the interest rate policy in the United States?
I would add another cut by the end of the year. We have signs of some slowdown in the American economy. The main question is whether the speed of this slowdown is enough for us to move towards a different inflation trajectory. It seems not to me. There needs to be indications that the slowdown will deliver inflation within the target within a reasonable horizon. Today, it is still too early to say. What I see is – most likely – a slow slowdown in inflation and then the Fed (Federal Reserve, the American central bank) will have to understand that it is not a scenario of last mile (the last mile), has the last two miles (latest two miles). And then with the last two miles it gets a little more difficult and ends up pushing the interest rate cut scenario. The truth is that, today, the most likely scenario still points to the beginning of the cycle happening in September. They have a cut in September and, perhaps, in December. We think it’s more like one than two.
In fiscal policy, like you. Do you see fiscal targets being met?
I don’t think it will meet this year’s requirement, but it’s not the most relevant thing in this story. The bottom line is this: there was a target trajectory when the new fiscal framework was announced with all the fanfare. And he already started with a broken foot. It came with a huge deficit, even if you ignore the issue of court orders. It is a recurring deficit of more than 1% of GDP, with a strong spending growth trajectory. The chance of delivering this primary outcome trajectory is low.
Why?
To begin with, it depends on a lot of revenue that you have no idea whether it will happen or not. That’s one point. There is another more serious point. You look at what is in the PLDO and we see, as a rule, federal spending growing within the limit allowed by the fiscal framework. With the exception of 2028, it is always at the 2.5% limit, in addition to inflation. It’s a big expansion in spending. Even with this expansion, looking at discretionary spending, to fit within the limit, it has to be smaller each year. It is not smaller just as a proportion of GDP nor smaller adjusted for inflation. It is smaller in nominal terms.
So, for this spending trajectory to materialize, discretionary spending, such as investment, would need to be cut significantly compared to what it is today, including in an election year. What is the chance of this happening? Our fiscal policy is completely off track. It is a given that they will not deliver either the target or the spending trajectory they are promising. There will be generally worse results and greater expenses than what we have. We have a fiscal policy that is certainly not consistent with the convergence of inflation towards the target. And it was not gratuitously that the Central Bank drew attention to this.
And what is the consequence of dealing with all these local uncertainties in the context of a more difficult external scenario?
As we have relatively little external debt and a lot of reserves, the thermometer for this is not so much the issue of the CDS (Credit Default Swap, the “country risk”). Ultimately, the CDS will look at what happens to external debt. The risk premium will appear in the dollar and in the interest rate curve. We are not living with the real interest rate of 5, 10 years at the top because the Central Bank is more or less dovish. We are living with high real interest rates because the tax system is rubbish.
This weekend, Mr. column debuts on ‘Estadão’. What is the expectation?
I am a macroeconomist. It’s the most charming part, but obviously the most controversial. Let’s talk about inflation, fiscal, growth, what we expect abroad. Obviously, throughout this process, I will get some things right and others wrong. It’s part of the game. I have enough time in the window to know that making mistakes isn’t a big problem if you get more things right than you get wrong. So as long as I’m getting more things right than I’m getting wrong, I’ll keep doing it – or, at least, as long as people think I’m getting more things right than I’m getting wrong. The objective is, as far as possible, to deal with topics that can be complex in the simplest way possible, without losing rigor – and within the limit of humor permissible today.
Tags: Copom division explained consequences inflation GDP Schwartsman
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