The dispute between President Luiz Inácio Lula da Silva and Central Bank President Roberto Campos Neto continues as the country’s basic interest rate (Selic) remains at 13.75%, which represents the highest real rate globally (8.39%). On Thursday (06/04), Lula criticized once more Selic and the inflation target, which is currently at 3.25%. He also mentioned that the government could change the inflation target and that he will appoint the BC directors according to the government’s objectives.

Change the Inflation Target

In March, Campos Neto stated that Selic was low to reach the current inflation target, which is 3.25%. For him, it should be at 26.5% to reach the objective. For Lula, if this is the case, then the target is wrong, thus it should be changed.

Despite the criticism, Lula did not say if he intends to change the inflation target. Communications Minister Paulo Pimenta said that a change in the inflation target is possible and that it will be discussed when the President returns from a trip to China, which should happen in April.

The government can change the inflation target. This parameter is defined by the National Monetary Council (CMN), in which the government has 2 of the 3 votes: the collegiate is formed by the Finance and the Planning ministers – respectively Fernando Haddad and Simone Tebet – and by the Central Bank President.

Central Bank Directors

Lula also announced that he will change the directors of the Central Bank according to the interests of the government. This year, the President will be able to replace 2 of the 9 members of the entity.

Central Bank Perspective

On Wednesday (05/04), Central Bank President, Roberto Campos Neto reinstate his view on the topic. He stated that the cost of fighting inflation is high for society and brings harsh impacts in the short term, such as the slowdown of the economy and in job creation. However, for him, the cost of not fighting inflation is much higher and has far more harmful impacts in the medium and long term.

The BC has evaluated that the rise in prices causes damage, mainly, to the poorest population, proportionally taking a larger part of their income, in addition to disorganizing the economy and harming the planning of companies.

Tax Reform and New Fiscal Rules

Among the government’s bets to solve this standoff are the tax reform and the new fiscal rules proposed by Finance Minister Fernando Haddad.

The new fiscal rules, which were presented last week by Haddad, seeks to discipline government spending. Meanwhile, for the moment, with the tax reform, the government wants to change consumption taxes, unifying them into a single VAT (value added tax). The fiscal rules will place barriers to debt growth, since high debt generates inflation, high interest rates, unemployment, and low GDP growth. The tax reform was designed to improve the business environment and increase revenue.

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