By Claudia Safatle to Valor Economico.

The Central Bank raised the tone. In the minutes to the latest meeting of its Monetary Policy Committee (Copom), released Thursday, it warned the market that there will not be another cut to the base interest rate, even with economic activity still very weak.

For the government, the monetary authority also left important messages. The main one may be summed up this way: There won’t be room for a “big GDP” while the economy’s investment rate continues falling.

Investment has been falling for five quarters in a row — figures for the last quarter of 2012 are not out yet, but there are no signs of reaction. A recovery will depend on the private sector’s confidence in the future, and thus in government actions to reduce uncertainties that prevent businesses from touching their cash and increasing production.

In paragraph 26, the minutes’ most important, the Copom exposes its view: “The pace of recovery for domestic economic activity — less intense than anticipated — is due essentially to limitations in terms of supply.” And it completes: “Given its nature, then, these impediments can’t be addressed by actions of monetary policy that are, par excellence, demand-control tools.”

It’s important to recall, in this context, that investments only increase supply when concluded. Before, they are factors of more demand pressure.

As supply limitations, they range from the tight labor market — with unemployment very low — to restrictions in the availability of some inputs, including power.

Energy consumption grew about 4.5% last year, even with tepid economic activity — growth of around 1% — over the entire year. With stronger economic expansion, consumption will be even higher.

For the BC, investment may react, resume growth and even give a boost to GDP expansion still this year. Investment is the most volatile component of aggregate demand. But it won’t be Copom the one to provide more monetary stimulus to revive the economy, as it is not in the committee’s plans to promote monetary tightening to control price rises resulting from supply restrictions.

Inflation, indeed, will only start to fall in the second half, according to official projections, even considering the deepest decline in electricity rates, the postponement of hikes in urban transit fares to mid-year and a raise of only 5% for gasoline — as anticipated in the minutes.

Price rises are more widespread and “the reversion of tax exemptions, combined with seasonal pressures and localized pressures in the transport segment, tend to contribute for inflation, in the short term, to show resistance,” the BC warns. Incentives in the tax on industrialized products, or IPI, for purchases of cars and large appliances are being reduced and are expected to end in June, with possible impact on these products’ prices.

Fiscal expansionism is another element weighing on the risk balance of inflation. Regarding the fiscal policy, the BC is considering a primary surplus of R$155.9 billion this year and an amount equivalent to 3.1% of GDP in 2014. In this case, the BC’s concern is not with indicators of solvency in the public sector — given by the net debt-GDP ratio — but with demand expansion produced by higher government spending.

The Finance Ministry, though, hasn’t communicated what fiscal target it indeed intends to pursue this year, and Congress hasn’t yet approved the budget for 2013.

The Copom minutes, thus, could be seen as part of the classic central bank action of getting into the room and taking off the beer when the party is heating up. In this case, though, the party has not even started, but the Copom makes it clear that from the monetary side there’s nothing more to do, and supply issues are not its problem.

There would be an alternative in the exchange-rate policy. After all, the real’s depreciation last year hasn’t shown to be able to stimulate growth. On the contrary, if it had any effect, besides producing more inflation, it was a contracting one: It made imports in general, and those of capital goods in particular, more expensive, and also reduced the middle classes’s purchasing power. The exchange rate, which reached a high of R$2.14, R$2.15 per dollar, is now around R$2.05.

Government possibilities would include, for example, removing in a speedier way steps taken to restrict inflows of foreign money. It would be difficult, though, for President Dilma Rousseff to admit now an appreciation of the real.

In the beginning of her administration’s third year, it gets exposed the impossibility of having everything at the same time: inflation according to the target, depreciated currency, low interest rates and the economic growth the government pursues — something around 4%, 4.5% a year.

Inflation is likely to reach the top end of the target range (6.5%) in the next few months, only starting to weaken in the middle of the year. Growth tends to be moderate, around 3%. And interest rates, for now, will remain stable at 7.25%.

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