CeNTRAL BANK GOVERNOR OF THE YEAR
The central bank governor of Brazil gets the nod for his deft handling of monetary policy, which has allowed him to bring down interest rates before developed economies.
By Thierry Ogier
Roberto Campos Neto has earned respect from his peers and investors since he was appointed governor of the Central Bank of Brazil (BCB) in 2019. This esteem has not faded, not even through the hard times for any central bank governor to manage the surge in global inflation since 2021. In fact, Campos has been ahead of the curve in fighting inflation.
This adroit management of monetary policy to bring down inflation is a main reason why his performance was “by far†the best of any central bank governor in Latin America and the Caribbean over the past year, says Walter Molano, chief emerging markets economist at BCP Securities in Greenwich, Connecticut.
“He set a very good precedent for the rest of the region to follow,†Molano says. “Chile, Colombia, Mexico all followed the trajectory that Campos did, and he stuck to his guns. He showed an enormous amount of discipline at looking at the data and doing what is best for the economy.â€
When asked how he achieved this, Campos himself says it took a careful reading of the direction of global inflation as the COVID-19 pandemic began to ease in 2021, sparking a resurgence in demand.
“We had an early view that the global inflationary process had a strong demand component linked with the huge stimulus measures adopted by authorities,†Campos tells LatinFinance. “This timely response helped us to start reducing inflation last year, earlier than in other countries. The BCB has also managed to achieve a soft landing, reducing inflation with low costs in terms of economic activity and credit.â€
After taking Brazil’s monetary policy interest rate, the Selic, to a 13.75% peak in August 2022 from 2% between August 2020 and March 2021, when there were lockdowns during the pandemic, the central bank began loosening its monetary policy in August this year. It cut the rate by 50 basis points to 13.25% at its meeting that month and then by the same amount to 12.75% in September.
“The current context, characterized by a stage in which the disinflationary process tends to be slower and with partial re-anchoring of inflation expectations, requires serenity and moderation in the conduct of monetary policy,†Campos says. “If the scenario evolves as expected, the BCB anticipates further reductions of the same magnitude in the next meetings. We judge that this pace is appropriate to keep the necessary contractionary monetary policy for the disinflationary process.â€
"If the scenario evolves as expected, the BCB anticipates further reductions of the same magnitude in the next meetings"
– Roberto Campos Neto
Inflation is still above the official target of 3.25% for 2023, at 4.6% in August. But the market’s expectations that it will come down to the target level are improving.
MartÃn Castellano, chief Latin America economist at the Institute of International Finance in Washington, DC, lauded Campos for keeping inflation expectations under control despite many challenges, including attacks by the government of President Luiz Inácio Lula da Silva, who took power in January, to cut the Selic rate to spur economic growth.
“He showed strong leadership to withstand a new administration and several board changes,†Castellano says.
Inflationary expectations have receded to around 4.9% for 2023 and 3.9% for 2024, according to a latest central bank survey of about 160 asset managers, banks and other entities in September. That’s down from expectations of 6% and 4.2% inflation for those same periods in the March survey.
William Jackson, chief emerging markets economist at Capital Economics in London, says this decline in inflation expectations has come in large part thanks to the central bank’s “credibility,†allowing “Brazil to be one of the first countries to lower interest rates in this global monetary cycle.â€
Looking ahead, Campos says the next challenges for the central bank are to consolidate this decline in inflation to meet the targets of 3.25% this year and 3% in 2024 and 2025.
A new fiscal framework to cap government spending will help in anchoring these inflation expectations, he says.
“The new fiscal framework avoids tail risks on public debt growth. On the other hand, the setting of the inflation target for 2026 by the National Monetary Council at 3% and the announcement of the change toward a continuous horizon targeting system have reduced uncertainty about the targets for the coming years, reinforcing the credibility of the inflation targeting regime,†Campos says.
Campos has not had it easy as the first governor of an officially autonomous central bank in Brazil. He has had to navigate choppy waters, not only acting early to tighten monetary policy as inflation rose globally but to resist political pressures at home to cut rates too soon.
His fight to bring down inflation has not gone down unnoticed on Wall Street. “He had the fortitude to drive up interest rates the way he did, he had the fortitude to stir down the political pressure from the presidency,†Molano says.
“He had the fortitude to drive up interest rates the way he did, he had the fortitude to stir down the political pressure from the presidency.â€
– Walter Molano
Castellano says much the same: “The central bank of Brazil managed to remain in control of the disinflation process despite political volatility,†he says. Jackson adds, “He has navigated enormous challenges, including pressure from the government.â€
Campos has avoided confrontation with President Lula, and he insists on the merits of central bank autonomy.
“One of the main benefits of the law is to separate the political cycle from the monetary policy cycle,†he says. “Economic literature shows that central bank autonomy is associated with lower and less volatile inflation, without compromising economic growth. The benefits of BCB’s autonomy were mainly manifested in 2022. The BCB promoted the largest increase in the policy rate in an election year. This policy has not been exempted from criticisms, and we are facing the first real test for the autonomy [of the central bank]. However, we have seen that this timely action has allowed for a swifter inflation control. We are convinced that, as time passes, the benefits of autonomy will become clearer, as well as the understanding of the technical character of the BCB’s actions. Moreover, we still hope for additional steps for a more complete autonomy framework, such as budgetary and administrative autonomy.â€
Campos says he also has had to deal with an increasingly complex external environment.
“While fiscal imbalances have been mostly a concern for emerging markets, previous developments in the UK and the recent Fitch downgrade of the US rating illustrate that markets are now less lenient with fiscal exposure in advanced economies,†the central bank governor says. “Monetary policies in these countries have mostly been hawkish but fiscal policies remain expansionary, which raises concerns regarding the sustainability of fiscal accounts.â€
He warns that inflation is still a threat globally, including in response to rising tensions between China and the United States, the world’s two largest economies.
“With the uncertainties in the global outlook, the BCB sees risks for inflation in both directions,†Campos says. “Among the upside risks are a greater persistence of global inflationary pressures and a stronger than expected resiliency on services inflation due to a tighter output gap. Among the downside risks, a greater-than-expected deceleration of global economic activity and a larger-than-expected impact on global disinflation from synchronized monetary policy tightening. This challenging scenario calls for caution, reinforcing the view of serenity and moderation in the next steps to be taken by the monetary authority.†LF
