Brazil’s central banker Roberto Campos Neto once again defended the autonomy of the monetary authority as essential for controlling inflation and bringing stability to the financial system. He further noted that if the country were to follow financial models mechanically, “benchmark interest rates would have to be much higher” than the current level of 13.75 percent per year. “We understood it would be a huge shock, and then we softened [the interest rate level],” he said during an event organized by the newspaper Folha de S.Paulo and the banking federation Febraban.
Mr. Campos Neto added that the Brazilian economy needs more reforms to produce more structural growth — that is, economic growth not based exclusively on public spending and consumption, which generates inflation.
“It is difficult to balance a debt level of 80 percent of GDP with a rising neutral real interest rate and low structural growth. We need to work to raise our structural growth rate. In this case, we are talking about reforms,” said Mr. Campos Neto.
Speaking on the same event, Senate President Rodrigo Pacheco brought the economic agenda of the Luiz Inácio Lula da Silva administration to the fore by, once again, saying that the country recently went through structural reforms — such as the labor and pension reforms — and that its high interest rates are the only factor preventing Brazil from growing.
“We have USD 340 billion in foreign exchange reserves, inflation under control in 2023 and 2024, and a strong currency priced below USD 5. In addition, Brazil holds the record for producing orange juice, soy, coffee, cellulose, cattle, and chicken. We have mineral and oil riches. And we overcame attacks against democracy. Today, institutions talk to and respect each other. What appears to be an obstacle [for the country] today is the increase in interest rates,” said Mr. Pacheco.
Since 2021, the Central Bank has had operational autonomy to pursue inflation targets. Its board members are appointed for four-year periods that do not coincide with presidential terms. The move is intended to insulate the monetary authority from politics, as past governments kept interest rates artificially low to stimulate the economy — with adverse effects in the long term.
But according to Mr. Pacheco, the Central Bank’s current policy is precisely what is leading to its autonomy being questioned. He made an appeal for the Central Bank to “seek the necessary ways to meet” society’s desire for lower interest rates.
President Lula has been a staunch critic of the Central Bank’s hawkish monetary policy, which, according to him, does not take into account damage to economic activity.
According to Mr. Campos Neto, however, there would be limited gain in making monetary policy more flexible. “Easing causes less damage to the economy,” he admitted. “But if the Central Bank softens [its monetary policy] for a very long period and loses credibility [with market agents], at some point, it will reach a tipping point, where the loss of credibility will generate greater economic losses than gains from smoothing,” he said, adding that President Lula has the right to enter into a debate on interest rates. “This is happening in several countries. But some statements [by the government] show that there is a lack of understanding of the rules of the game,” said the central banker.
The current monetary tightening cycle began in March 2021, after the Selic benchmark interest rate had reached its all-time low of 2 percent per year. Twelve consecutive increases followed, and since August last year, the Selic rate has been frozen at 13.75 percent per annum — the highest since January 2017. According to Mr. Campos Neto, only when inflation converges to the bank’s target range of 1.75 to 4.75 percent will the monetary authority shift its position.
Search
