Roberto Campos Neto insisted Brazil’s central bank won’t start an easing cycle until inflation risks are under control
(Bloomberg) — Brazil central bank chief Roberto Campos Neto stood firm during nearly five hours of questioning from lawmakers over his refusal to cut interest rates, insisting that policymakers will not begin an easing cycle until inflation risks are under control.
Campos Neto appeared before congress Tuesday for the first time since the eruption of his feud with President Luiz Inacio Lula da Silva, as senators grilled him over the bank’s decision to hold the benchmark Selic rate at 13.75% even as inflation hits its lowest level in over two years.
“It’s obvious that we want to have low rates and that the central bank wants to see borrowing costs fall,” Campos Neto told lawmakers. “You need to have correct timing and the correct credibility because we want a sustainable decline in rates.”
The hearing took place just one day after Lula criticized current monetary policy during a visit to Portugal, renewing a months-long dispute that has dominated the initial part of his term. The leftist leader, who inherited a sluggish economy upon taking office in January, sees a rate that sits at a six-year high as a drag on growth and a barrier to the prosperity he promised to deliver during last year’s campaign.
Improving inflation numbers have generated additional pressure on Campos Neto. Consumer price increases have receded from last year’s peak above 12%, and eased for the ninth straight month to 4.65% in March. Most economists bet that headline numbers will slow to 3.78% by June, and Campos Neto said last week that he sees the annual rate cooling to 3.5% by mid-year.
Policymakers led by Campos Neto have signaled that they aren’t ready to discuss interest rate cuts while inflation is projected to remain above the bank’s target level through 2025. Core measures that strip out the most volatile items, meanwhile, are still running fast and causing additional worries.
During the hearing, the central banker argued that the consequences of spiraling price increases would be far worse than the pain caused by holding rates steady, especially in a country with a history of hyperinflation.
“I know how much inflation hurts the poor,” Campos Neto said in response to questions about whether he knows the prices of milk, rice and beans, all of which are staple goods for Brazilians.
‘Contaminated’ Estimates
The hearing was the latest political test for Campos Neto, who has spent months defending the bank’s policy and autonomy while insisting that public pressure campaigns won’t cause it to change course.
Lawmakers were eager to turn up the heat during his first appearance in congress in nearly a year. One senator from Lula’s governing coalition used a blackboard to compare inflation and interest rate levels in Brazil and the US, before ending his speech by handing Campos Neto a hat branded with the logo of Banco Santander SA, where he worked before joining the central bank.
Campos Neto did not respond directly to the gesture seemingly meant to imply that he should leave his post and return to his former job. But he later defended the monetary authority from charges that its decision to maintain high rates is politically motivated, noting that it had been among the first central banks in the world to raise interest rates in 2021, and that it continued to do so last year even during a presidential election.
“Instead of delivering high inflation to the next president, we are coming in below the levels of other countries,” he said. “When you act quickly and decisively, the cost of bringing down inflation is lower.”
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Still, the current scenario doesn’t guarantee a rate cut in the near future, Campos Neto said. Most economists see annual inflation at 4.18% next year and 4% for the two years after, all above the monetary authority’s goal. A majority of analysts forecast the central bank board will hold interest rates at their current level for a sixth consecutive meeting next week, according to a Bloomberg survey.
Estimates that inflation will ease are “contaminated” by a round of tax reductions enacted by former President Jair Bolsonaro last year, economist Felipe Sichel said in an interview before the hearing. Lula’s government reversed some of the cuts earlier in 2023, reinstating levies on fuel. “But the inflationary pressures beneath them remain,” Sichel said.
Brazil’s development bank, known as BNDES, has said it plans to expand credit to certain industries in order to help companies borrow at lower rates. But throughout the hearing, Campos Neto warned lawmakers about the risks of increasing subsidized credit, saying it reduced the power of monetary policy.
Lawmakers also questioned Campos Neto about the government’s fiscal framework proposal, a plan to control public spending that Lula’s economic team submitted to congress last week. The government hopes the bill, which was initially welcomed by markets, will help loosen monetary policy, but late changes to it also raised concerns about estimates that it would raise revenues by 150 billion reais ($29.7 billion).
Read More: Lula Delivers Plan to Rein In Debt Amid Revenue Uncertainty
Campos Neto, who has previously said the rule is “positive,” called it a step in the right direction but said that the central bank needed to wait to judge its effects on inflation expectations.
–With assistance from Bruna Lessa and Daniel Carvalho.
(Recasts with details of hearing throughout)
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