Understand the change in inflation target calculation

Understand the change in inflation target calculation

a National Monetary Board On Thursday, the 29th, (CMN) announced the decision to change the inflation target system to the “continuous model” from 2025 onwards – from January to December.

But what does this change really represent in the analysis that state agencies and regulatory agencies have been projecting? Will it affect the disclosure and maintenance of the inflation target? And how that might affect the Selic base rate – today at 13.75%.

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At present, the inflation rate is expected to be targeted taking into account the calendar year, that is, the period from January to December of the year. In practice, the CMN – made up of the Ministers of Finance and Planning and the President central bank (BC) – sets the inflation target for that year.

From this, the index is pursued by BC, according to the policies proposed by Monetary Policy Committee (Cobum), formed by the President of the Corporation, today, Roberto Campos Neto, and its managers. They have autonomy in setting the prime interest rate, the Selic, which acts as a brake on inflation. It will directly affect the country’s credit, investments, consumption, growth prospects and exchange rate.

If, as currently formulated, the target is not achieved, the head of the central bank must publicly disclose the reasons why the result has not been achieved. This is done through an open letter to Ministry of Finance.

How will it be in 2025

With the ongoing target, approved today by the National Monetary Board, the country will now seek a permanent value of inflation within a period technically determined by the central bank. Thus, the target for 2025 and 2026 will be 3%, according to Mobile Communications Network (CMN). The central bank’s efforts will be to keep the index within the target throughout the period. The concept is that if the value is in the range of 1.5 percentage points more or less, it will be within target.

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The change may be reflected in the future course of the base interest rate. Since the target will be projected over a wider horizon, BC may not need to make such drastic adjustments, as is currently the case in Brazil. Thus, reductions or increases in interest rates can eventually be mitigated based on the scenario of high inflation over longer periods, thus reducing the negative effects that both decisions may have on the macroeconomic plan.

Countries such as New Zealand, the United States, Japan, the United Kingdom, Mexico, and the countries of the Eurozone also adopt the continuous inflation target system.

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About the Author: Camelia Kirk

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