COPOM, FOMC and ECB: Central Banks Carrying Out Their Mandates

BRAZIL ECONOMICS - Report 20 Mar 2023 by Affonso Pastore, Cristina Pinotti, Paula Magalhães and Diego Brandao

Robert Mundell, who won a Nobel Prize for Economics in 1999, expressed the “principle of effective market classification”, advocating the use of each economic policy instrument in pursuit of the objective with the greatest efficiency. The instrument that has a “comparative advantage” to stanch a bank run, like the one that just occurred in the USA, is to guarantee deposits, not adjust the interest rate.

This also applies to the problem in Europe involving Credit Suisse. In Brazil, the pressure exerted both directly by Lula and indirectly via Haddad and Tebet, for the Central Bank to hastily start lowering the interest rate, is now combined with pressure from the private sector, under the argument that a credit crunch is impending due to “Americanas case” (the filing for court-supervised reorganization by the retail giant Lojas Americanas). This pressure from the government is ill-advised in light of the inflation caused by high demand and unanchored expectations, and that from the private sector is counteracted by analyzing the levels of capitalization and results of stress testing published in the Central Bank’s latest Financial Stability Committee Minutes.

Here we present arguments indicating there should be no surprises, both from the COPOM, whose communiqué should maintain the indication that the SELIC rate will remain high for an extended period, and from the FOMC, which based on the measures taken to contain the runs faced by SVB and Signature Bank, should continue raising the fed funds rate, with a higher terminal rate than the previous estimate of 5.1%. In our interpretation, both monetary authorities will follow the principles expressed by Christine Lagarde, that the objective of a central bank is to seek to attain the inflation target, using each available instrument to achieve the greatest efficacy.

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