Brazil’s central bank chief pledged to work with Luiz Inacio Lula da Silva’s administration in an effort to make peace with a president who has been escalating his criticism of high interest rates.
(Bloomberg) — Brazil’s central bank chief pledged to work with Luiz Inacio Lula da Silva’s administration in an effort to make peace with a president who has been escalating his criticism of high interest rates.
“I understand President Lula is in a hurry,” Roberto Campos Neto said during a TV interview late Monday. “The central bank needs to work with the administration and I’ll do everything I can to bring it closer to the government.”
Campos Neto defended the bank’s autonomy and the country’s inflation goals, currently set at 3.25% for 2023 and 3% for the next two years. Raising the targets, he said, wouldn’t help lower interest rates and could backfire.
“If we change the target in a bid to gain flexibility, the practical impact of that is that we’ll lose flexibility,” he said during the wide-ranging, two-hour interview.
Swap rates fell early on Tuesday as traders reduced bets on a possible increase of inflation targets after Campos Neto defended them. Contracts maturing in January 2024, which signal expectations for the benchmark Selic rate at year-end, fell 7 basis points.
Campos Neto’s unusual participation in one of Brazil’s most traditional interview shows came as members of Lula’s Workers’ Party call for his resignation, alleging he is an ally of former President Jair Bolsonaro working against the current government.
The central bank chief rebuffed the accusations, denying that wearing the national jersey associated with Bolsonaro supporters while casting his vote in elections last year amounted to political campaigning. He added that he did make friends with members of the previous administration and hopes to do the same with the current one.
“He’s open to dialogue and understands the fiscal adjustment proposals made by the government, which are a path to lower interest rates,” said Felipe Sichel, an economist with Banco Modal. “The question now is how the Workers’ Party will answer, whether the government will help by reducing noise or whether it will keep giving reasons for inflation expectations to rise.”
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Inflation Outlook
Policymakers led by Campos Neto are holding borrowing costs steady at 13.75% as expectations for consumer price increases continue to rise above targets all through 2025. Annual inflation eased to 5.77% in January, though transportation costs and food prices are picking up again. Core measures, which strip out the most volatile items, have also eased but are still considered “too high” by central bankers.
President Lula has escalated his feud with Campos Neto, repeatedly criticizing current monetary policy and the central bank’s newfound autonomy during his first month in office. He has called the 2021 law that granted the central bank power to act autonomously “nonsense,” described interest rate levels as an “embarrassment” and suggested a higher 4.5% target to jump-start the economy.
Brazil’s inflation goals are set by the national monetary council, where Finance Minister Fernando Haddad, Planning Minister Simone Tebet and Campos Neto himself have a seat. The council traditionally sets and reviews targets in June, but could bring forward the discussion to as early as this week.
Campos Neto said he agrees with Haddad about the need to properly coordinate monetary and fiscal policies.
“Without harmony, on the one hand you’re stimulating the economy and on the other you’re slamming on the brakes, and that causes inefficiencies,” he said.
–With assistance from Daniel Carvalho.
(Updates with market reaction in fifth paragraph, economist comment in eighth paragraph.)
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