For the last couple of weeks, Brazil’s President Luiz Inácio Lula da Silva has decided to set his sights on the Central Bank and the country’s 13.75-percent benchmark interest rate. Both are easy targets, as the bank’s chairman, Roberto Campos Neto, was too close for comfort with members of the former government’s cabinet, and the layman believes the financial elite is the sole beneficiary of high interest rates.
While both sides appear to have lifted the banner of peace, tensions will not dissipate completely. After a razor-thin victory in last year’s election and still trying to find a footing while governing a highly polarized society, it is no wonder Lula is eager to deliver on his promises. And with his political nous, he also knows it is fundamental to keep his supporters mobilized.
And there is no better way to do that than by choosing an enemy.
It is no secret that higher interest rates act as a deterrent to economic activity expansion. By default, that is the tool monetary policy has at its disposal to fight the undesirable effects of inflation on society. The high cost of living punishes the poor, shortens the outlook for investments, and creates distortions that eventually contribute to income concentration.
While increasing the interest rate is a hard pill to swallow, there are technical reasons to justify doing it. The Central Bank uses mathematical models to determine the ‘optimal’ rates to curb inflation without overkilling the economy, it is certainly up for debate which interest rate levels are ideal.
There is merit to Lula’s argument that the interest rate is too high, but less to his allegations that the Central Bank — which has been autonomous in operational terms since 2021 — is trying to sabotage the government’s efforts to improve the lives of citizens by instituting a tighter monetary policy.
The dispute sparked debates over economic views regarding how best to tackle the inflation problem and political controversy over whether having a legally autonomous Central Bank...
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