Luiz Carlos Mendonça de Barros said that the market „should apologize“ to the Central Bank.
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The Central Bank (BC) of Brazil and the financial market failed to conduct the economy during the coronavirus crisis, according to Luiz Carlos Mendonça de Barros, former president of the National Bank of Economic and Social Development.
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The economist, who was briefly Minister of Communications in the Fernando Henrique Cardoso government, said in an interview with the newspaper O Estado de S. Paulo last week that maintaining interest at 2% per year created a trap for the Central Bank:
„There is a very serious trap for Copom. The Central Bank believed the market’s forecasts for inflation this year and next year four or five months ago. The market was wrong, the expectation was 2% for this year and even for next year it was low, between 2% and 2.5%. The Central Bank took this to heart, without criticism. And now the market has changed inflation expectations to over 3% by 2021“.
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Barros also argued that he „should recognize that he made a mistake and that the market made a mistake“, and that the current interest rate is unsustainable:
„It is unsustainable to have interest at 2%, but it is not known how the Central Bank will get out of this trap. There is no point in raising 0.15 percentage points, it will have to say in the „forward guidance“ that it has missed both the intensity of the recovery and future inflation. The lesson is that every protocol for macroeconomic action by the government must have a correct analytical basis. More than that, if it is wrong, it corrects. It should have been corrected by now. They will blame the public deficit, but that has nothing to do with it“.
He also argues that interest rates need to keep up with inflation expectations for 2021, which is 3.5%. The Ministry of Economy of the current government preaches a low-interest economy, with Minister Paulo Guedes often highlighting this as an advantage.
This week, Congress is also preparing to vote on the autonomy of the Central Bank, something that was defended last week by Guedes and defined as „a dream.
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Luiz Carlos Mendonça de Barros was minister of former president Fernando Henrique Cardoso for less than a year in 1998. At the height of the FHC era privatisations, the minister was caught in clamps negotiating the formation of a consortium of the Telebrás System, resigning afterwards and claiming that „there was not a comma out of place“ in the privatisations under his responsibility.