Last year, due to a confidence crisis and doubts on the Brazilian public debt and the Brazilian economy the exchange rate depreciated strongly and, as a result, we have observed an increase in the current inflation rate and a contamination of future inflation expectations. The conduct of monetary policy will have as strategic priority the avoidance of this transitory hike in inflation being perceived as permanent. We will fight, unrelentlessly, against the expectation of an increase in the level of inflation and the indexation of the economy. The goal is to bring inflation back to the trajectory defined in the targets already set by the National Monetary Council (CMN). The Central Bank will pursue a path of convergence to the already defined inflation targets, taking into account that this convergence will not occur instantaneously. It is a common practice among Central Banks in the world to dilute the convergence of inflation to the targets over a period longer than a year. This is particularly important when an inflationary bubble arises due to a supply shock, as has been the case in Brazil. Therefore, we will proceed by aiming at an inflation rate that takes into account the inertia inherited from inflation in 2002, and the supply shocks stemming from the increase in administered and monitored prices in 2003. Therefore, monetary policy will maintain the goal of ensuring that inflation will return to its target path within a time period that does not result in unnecessary costs to the economy. Transparency in the process is essential.
This analysis contains an important misperception. Stability is not an end to itself. It is a necessary condition for growth and social justice. An environment of stable prices establishes a necessary condition for output growth by reducing uncertainties and distortions, lengthening decision-making horizons and allowing for an increase in investments and productivity gains. There is no dichotomy between price stability and economic growth, as stability paves the road for growth. Price stability allows the country to plan government actions. Moreover, it should be made clear that there is no such thing as a choice of higher sustainable growth with higher inflation. No country in the world has experienced prolonged periods of economic growth with high rates of inflation. Nonetheless, examples abound of short periods of growth driven by mistaken policies, usually inflationary, which were followed by recession and stagnation that lasted for much longer periods. The Central Bank's goal is, therefore, to contribute to economic growth by maintaining price stability. In the long run, higher productivity is the element that underpins economic growth. To achieve higher productivity growth, it is essential to increase the public sector's savings rate, thereby allowing society to invest in production as opposed to primarily financing the public sector. Aside from its effect on output growth, a permanent reduction in inflation inherently and unmistakably brings about a reduction in poverty, with the consequent social inclusion, in addition to sowing the seeds for reducing inequality.