Brazil’s central bank has been independent for a couple of years, but that’s not stopped a rise in political meddling that may actually be keeping interest rates higher than they could be to the government’s chagrin, says a former central banker.
By Rodrigo Amaral
Brazil’s central bank has been independent for a little over two years, and the leftist government of Luiz Inácio Lula da Silva doesn’t seem to like that. Since taking office at the start of this year, he has hurled insults at the central bank’s governor, Roberto Campos Neto, and his monetary policy for keeping the economy “shackled” when society desperately needs growth. Autonomy was a “dumb idea” to begin with, the ruling party’s leadership has said.
Central bankers are no strangers to criticism, and they certainly like to ignore the pleas. But the chiding is not always that easy to shake off when it’s led by a president who seems to blame the central bank for all the country’s economic woes.
Lula, now in his third non-consecutive term, has not only frequently attacked Campos Neto, but urged the business community to put pressure on him to lower interest rates. Lula even referred to the central bank governor as “that dude” during a diatribe.
If Lula’s goal is to bully interest rates down from their admittedly high levels – the reference rate was 13.75% at the beginning of March, he is likely to be disappointed, says Gustavo Loyola, who ran the bank between 1995 and 1997.
Loyola says the attacks will have the opposite effect to what Lula seems to intend. For starters, they put into question the confidence that the markets have in Campos Neto’s ability to deploy effective policies to bring down inflation, an old foe that still creeps investors in Brazil.
“The president must stay away from this kind of criticism. His words open the door for everybody to criticize the monetary authority,” Loyola says. “The threat that the government can somehow intervene in the central bank will always be there.”
Ever since the mid-1990s, when Brazil finally managed to achieve economic stability after decades of high inflation, the central bank has been pretty much left in peace by governments, even though formal autonomy was only granted by law in 2021. Even Lula tried not to meddle in his first two mandates, between 2003 and 2010. The outcome was that for several years Brazil boasted some of the highest real interest rates in the world, at between 10% and above 20%.
The high-rate policy, however, also created a strong baseline to take advantage of the commodities boom of the 2000s and deliver some of the most robust economic performance in Brazil’s history, bar a minor contraction in 2009.
In the 2010s, when growth slowed, interest rates fell significantly, helping the country to develop the local capital markets as people turned to bonds and stocks for better returns than bank deposits. Between August 2020 and January 2021, the reference rate was kept at 2%, a remarkably low level for the country. But after the lockdowns for the pandemic, inflation climbed above 10% in 2021, and Campos Neto was quick to pull the trigger and take the reference rate to almost 14%.
Markets loved the bold stance, but Brazilians were not so happy. Lula has embraced this discontent. He claimed that Campos Neto pursues “European standards” of inflation rather than a policy more adjusted to the needs of the Brazilian economy.
The central bank’s policy seems to be doing its job: inflation slowed to less than 6% in 2022. Loyola notes that, as result, at the start of 2023 the markets were preparing for an early loosening of the monetary policy.
Now, however, those expectations have been reversed.
“A rate cut might have been possible if the government had not directed so much criticism at the central bank and had put in motion a well-structured fiscal effort,” he says. “Commodity prices have fallen, taking pressure off the currency, mitigating some demand factors that had been pushing inflation up. But uncertainties remain high and aggravated by the government’s attitude.”
The formal autonomy gives Campos Neto some leverage to resist the pressure, but is not enough to calm markets, he points out.
“The pressure can turn the lives of central bank leaders into hell.”
– Gustavo Loyola
“The pressure can turn the lives of central bank leaders into hell. It can convince some of them that the time has come to resign,” says Loyola, who is now a partner and CEO at Tendencias, a consultancy in São Paulo.
The attacks have also nurtured a view that the government may select less hawkish members to the central bank’s board of directors, where they’ll act as Trojan Horses, as Loyola puts it, to influence decisions on interest rates and other policies. Another concern is that a more inflation-friendly economist may replace Campos Neto when his mandate expires next year.
“It is all counterproductive,” Loyola says. “We are already seeing a worsening of inflationary expectations and an increase of interest rates in future markets.” LF