MNI POLICY: BCB Works On Moves To Boost Policy Transmission

The Central Bank of Brazil is working on measures to unclog monetary policy transmission channels and increase their effectiveness, including moves to reduce the size of the government-subsidized directed credit market and to improve the functioning of the foreign exchange market, MNI understands.

The measures will be detailed by mid-year. The FX measures will not involve any change to the BCB’s current free-floating regime nor include increased market intervention, MNI understands. The BCB monitors the FX market and regulates participating financial institutions.

On the monetary policy front, the idea is to make policy more effective in the credit market, also regulated by the BCB, allowing for lower interest rates over time. Government-subsidized lending, a public policy tool, accounts for more than 40% of total loans. (See MNI INTERVIEW: BCB To Cut Twice To 14%, Iran Key - Le Grazie)

QUESTIONS OVER TRANSMISSION

Historically, the country has faced high interest rates and frequent inflationary episodes. More recently, when borrowing costs reached 15% and activity still proved more resilient than expected, with unemployment at record lows, analysts began to question the effectiveness of monetary policy.

In the years following the pandemic, the central bank revised upward its estimate of the neutral interest rate, now seen at 5% in real terms, providing further evidence that monetary policy may have become less effective.

The BCB decided to cut its Selic rate by 25 basis points to 14.50% last week, though, due to the war, market participants believe the terminal rate will be higher than previously expected. They see the cycle ending near 14%, rather than the initial expectation of 12%, and a still-elevated level for inflation around 4%, without any convergence to the 3% target even in the long term.

The BCB’s strategic planning is revised every four years, and the guidelines released at the end of last year are based on five pillars: strengthening the effectiveness of monetary policy transmission, ensuring the soundness of the financial system, improving communication with society, and securing budgetary resources.