A cool head when the heat is on
When a major truckers’ strike in brazil paralysed the country for 10 days in the second half of May inflation spiked.
Having spent nearly a year below the central bank’s target range of 3%-6%, annual inflation jumped to 4.39% in June, thanks to month-to-month price increases of 1.26%. Yet the central bank hardly flinched, leaving the benchmark Selic rate unchanged at 6.5%.
Doing this “without provoking a major reaction in the real and local currency bond yields” was notable, says Edward Glossop, Latin America economist at Capital Economics.
“Previously, the central bank would not have had the credibility with the markets to be able to look through such an event. The market believes they have inflation under control.”
Graham Stock, head of emerging market sovereign research at BlueBay Asset Management, describes Goldfajn’s approach as “calm orthodoxy”, saying it has worked very well in a country going through a difficult time and that has historically had high volatility in inflation.
“In his second year in office, Goldfajn has continued his good work, increasing the focus on the medium term inflation outlook and looking through the short-term volatility in the exchange rate,” says Stock.
THE RIGHT COURSE
The central bank’s position was soon proven right: monthly inflation swiftly fell to negative 0.09% by August. Annual inflation, having hit its highest level in 16 months at 4.48% in July, fell back to 4.19% in August.
“The truckers’ strike was certainly an important shock, but inflation in the future was more important, so we waited to see what happened,” Governor Goldfajn told GlobalMarkets. “In the end, inflation went up but then came back down again, and there was no lasting effect.
“You need to have the persistence and resilience not to overreact to nervousness.”
That Brazil’s central bank has the luxury to look through the short term is testament to the commitment to inflation-targeting that Goldfajn has shown since taking a hawkish stance soon after taking office in May 2016.
Inflation had peaked at 10.67% in 2015 and had been above, or within 20bp of, the top end of the target range since 2009; in 2017 it ended at 2.95%.
Not only that, but this year the bank was able to again announce a reduction in the inflation target. Having been stuck at 4.5% plus or minus 1.5% since 2005, last year the bank had been able to slash the target to 4.25% in 2019 and 4% in 2020. In June it added another lower target: 3.75% for 2021.
Despite what the governor describes as a recent “wave of pressure” in the form of an appreciating dollar, and with Brazil shrouded in political uncertainty amid presidential elections, it feels like little will ruffle the governor’s approach.
“We will just have to see what the impact of the recent shock and elections will be on future expectations,” he says.