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The autonomy of the Brazilian central bank becomes a target for criticism of Lula

The autonomy of the Brazilian central bank becomes a target for criticism of Lula

The new independence of Central Bank of Brazildesigned to shield him from politics, has made him a comfortable target for criticism from the new government, which can use him to fire up his leftist base and blame him for economic problems.

Since his inauguration on January 1, President Luiz Inácio Lula da Silva has repeatedly attacked the bank, run by respected economist and financial markets executive Roberto Campos Neto, calling its interest rates excessively high and “shameful” and blaming them for slowing down growth.

Further to his left, Socialist leader Guilherme Boulos branded Campos Neto an agent left in office by Lula’s far-right predecessor, Jair Bolsonaro, to “boycott” the economy.

With the bank’s autonomy established by law under Bolsonaro in 2021, its board of directors is no longer changed at the same time as new governments take office, so Campos Neto’s term as governor runs until the end of 2024.

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Two of his close aides said Campos Neto was not considering leaving the bank despite government pressure.

They stressed, on condition of anonymity, that Campos Neto considered the autonomy of the central bank a crucial institutional achievement, and that staying in office until the end of his term plays a role in safeguarding it.

Political observers attribute Lula’s irritation with the bank to a mix of slowing economic growth and high inflation that could threaten his government’s re-election prospects in 2026.

But economists believe Lula is acting and see no real danger that he will curb the bank’s independence.

“He needs to appease his political base to negotiate more freely with the Central Bank”said André Perfeito, chief economist at the Necton brokerage.

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The bank’s Selic benchmark rate now stands at 13.75%, and its monetary policy committee has not ruled out further increases to reduce inflation, whose last reading was 5.87% in mid-January, still far from the target official rate of 3.25% for this year.

The committee kept rates unchanged last week in its first policy decision under the new government, hinting that rates would stay high for longer than markets expect due to fiscal risks under Lula.

Shortly after taking office, Lula began to criticize the country’s official inflation targets as too low. This pushed up long-term bond yields and weighed on the real, sending the Brazilian currency underperforming its emerging market rivals.

Felipe Salles, chief economist at Banco C6, sees small near-term risks to independence due to friction, but said the government’s real objective might be to raise inflation targets.

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Official targets are set by the National Monetary Council, currently made up of the finance minister, planning minister and central bank governor, meaning the federal government has two of the three votes on the committee.

Lula has already defended that the country should pursue its own inflation pattern instead of following what he called the model “European”but government officials have downplayed any possibility of change.

The term of Campos Neto and his current eight directors will expire at different times between now and 2025, and it will be up to Lula to name all replacements, starting with the directors of Monetary Policy and Supervision, whose terms expire at the end of this month.

Lula is expected to appoint a like-minded person to the Monetary Policy post, who plays a key role in monetary policy decisions and oversees the foreign exchange and interest rate desks.

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But even if Lula fills the council with people fully aligned with his ideas, Campos Neto and his current directors will maintain a majority on the rate-setting committee until the end of the governor’s term.

Former central bank director Alexandre Schwartsman warned that Lula could ignore Campos Neto’s suggestions to replace the rate-setting panel or raise inflation targets.

“If this is the way to go, make no mistake, inflation expectations would rise”Schwartsman said.

Former central bank chief Henrique Meirelles, who led the institution in Lula’s first term, suggested that the president’s speech about the bank’s independence was counterproductive.

“The less you talk about it, the better you can control expectations and lower interest rates”Meirelles said.

Source: Reuters

Source: Gestion

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