Campos Neto faces the challenge of resisting pressure and maintaining his legacy in 2024

Roberto Campos Neto will enter the last year of his term as head of the Central Bank (BC) with the challenge of maintaining the credibility he has achieved.

After a tumultuous year, the consensus among analysts is that the BC president was successful in conducting monetary policy and had the ability to circumvent the pressure suffered from the Palácio do Planalto in relation to interest rate policy.

Since the beginning of the year, President Luiz Inácio Lula da Silva (PT) has directed a barrage of criticism against Campos Neto to force a reduction in the interest rate, which had been at high levels since 2021. “It was a bombardment without any sense”, he says Claudio Shikida, from the Millenium Institute.

The friction scenario began to be designed in 2020, during the Covid-19 pandemic. To keep the economy strong, the Monetary Policy Committee (Copom) drastically reduced the basic interest rate (Selic), which reached 2% per year, the lowest level in history.

Subsequently, the bold strategy needed to be revised, and the BC began a long cycle of monetary tightening to contain inflation. The rate hike began in March 2021, still under the Jair Bolsonaro government, and after 12 consecutive increases the Selic reached 13.75% per year. It remained like this for 12 months and only in August 2023, after inflationary pressures had been overcome, did the Central Bank begin to reduce the interest rate, currently set at 11.75%. The market expectation is that the rate will fall to 9.25% by the end of 2024.

“Campos Neto had a very correct reading of the environment and kept interest rates high for as long as necessary. There was undeniably a risk, so he managed to map it out well. If we had started lowering interest rates at the beginning of the year, we would be fighting with inflation until today”, assesses Juliana Inhasz, economist at Insper, remembering external uncertainties, such as fuel prices and the war in Israel.

Cláudio Shikida states that Campos Neto’s stance was firm in conditioning the start of the rate reduction to a complete proposal for a fiscal rule, which came with the framework. “We have falling inflation, as the president wanted [Lula]but without taking any risks”, he says.

The inflation target, defined by the National Monetary Council (CMN), is 3.25% for 2023, with a tolerance range of 1.5 percentage points up or down. In the last quarterly inflation report, the BC reduced the chance of inflation exceeding the target ceiling of 4.75% to 17%. In the previous two years, the IPCA had been above the upper limit.

Management marks autonomy of the Central Bank

Campos Neto’s mandate marks the first administration under the law approved in February 2021 that grants autonomy to the BC.

The result of a merger between the Executive and Congress, the rule grants fixed four-year terms of office to the president and directors of the Central Bank, which cannot coincide with that of the President of the Republic. It also determines that the head of the monetary authority must provide clarifications to Congress at least twice a year.

An old project of liberals – including Senator Roberto Campos, icon of Brazilian liberalism and grandfather of the current president of the BC –, autonomy is a way of shielding the monetary authority against interference from occasional governments.

It gained strength after Dilma Rousseff (PT) left the presidency, precisely to prevent episodes of submission of the Central Bank to the interests of the Executive, as was seen in the management of Alexandre Tombini, who was at the head of the BC between 2011 and 2016. Likewise, it aims to annul attempts like that of President Lula when putting pressure on Campos Neto.

At the time of the law’s approval, the president of the Chamber, Arthur Lira (PP-AL), highlighted the institutional progress resulting from the measure. “There is detachment from the current government [de Jair Bolsonaro] to treat this issue with absolute normality, while so many other governments have always interfered in this agenda so that it would not be approved”, he said.

Since then, Lira has maintained support for the conduct of the BC president. “[Campos Neto] has been a zealous guardian of the currency and the autonomy of the Central Bank, regardless of pressure from political and economic agents who would like a more flexible interest rate policy”, the president of the Chamber told Folha de S. Paulo last week.

Campos Neto was harassed for aligning himself with the policies of the Bolsonaro administration

With the approval of both Paulo Guedes, Minister of Economy at the time, and Campos Neto, the approval of autonomy brought credibility to the Central Bank.

Due to his alignment with the policies of the previous government, Campos Neto was harassed by the government and the PT throughout the year. More trivial issues also weighed against it, such as the fact that Campos Neto went to vote wearing a Brazilian team shirt.

The president of the PT, Gleisi Hoffman (PT-PR), among the various attacks she directed at the president of the BC, accused him of “sabotaging the country”, of taking decisions of a “political nature” and of reducing interest rates “accordingly”. drops”.

“Campos Neto’s performance this year was blatantly political, a true extension of the mandate of Jair Bolsonaro, who nominated him and for whom he ran an electoral campaign. The BC’s disastrous monetary policy, defeated at the polls, is proof of the great mistake that It’s the BC’s ‘autonomy’ law”, said Gleisi.

Among congressmen, the BC’s autonomy is a pacified point, despite attempts to revoke it. In February, PSOL presented a project to end autonomy and facilitate the dismissal of the institution’s presidents. Lula has also stated that the government intends to reevaluate the law at the end of Campos Neto’s term.

The challenge will be to maintain the downward trend and balance forces within the collegiate

After the beginning of the reduction in interest rates, Lula and Campos Neto have been rehearsing an approach. The president of the BC participated in the government’s end-of-year barbecue at Granja do Torto, and, according to reports, circulated freely among those present.

Nothing indicates, however, a change in Campos Neto’s attitude towards monetary policy or Lula’s insistence on demanding a faster reduction in interest rates, especially in an election year.

“Before, the question was ‘when’ interest rates would start to fall”, says Juliana Inhasz. “Now it’s ‘how much’ they’re going to fall.”

In the opinion of the Insper economist, pressure from Planalto will now come on the pace of the fall, under the allegation that inflation is already under control. “Campos Neto should maintain the pace he sees fit, looking at the signs of the economy”, he believes.

The main message of the latest Copom minutes was the maintenance of the 0.5 percentage point cut rate for the next meetings, a strategy to ensure that inflation targets are met and market expectations are completely anchored.

On the other hand, there are still doubts about the balance of forces within the collegiate. As the terms of BC directors come to an end, the Lula government makes its own appointments. The BC’s current director of monetary policy, for example, is Gabriel Galípolo, appointed in May by the Minister of Finance, Fernando Haddad. He is today the most popular name to assume the presidency of the BC after Campos Neto’s term.

Another nominee at that time was Ailton de Aquino Santos, a career civil servant at the Central Bank, to the supervisory board.

On Wednesday (27), Lula appointed two other directors: Rodrigo Alves Teixeira, for the area of ​​Relationships, Citizenship and Conduct Supervision; and Paulo Picchetti, for International Affairs and Corporate Risk Management.

Rumors often arise, not always true, about Galípolo’s disagreement with former Copom members, suggesting a split in the committee.

In early December, the market speculated about a speech by Galípolo at a JP Morgan bank event and concluded that he was inclined to defend a greater acceleration in interest rate cuts. Galípolo and other directors denied it.

In addition to the alignment with Lula, old heterodox speeches given in lectures and debates, defending government currency issuance policies and little attention to the fiscal scenario, weigh against Galípolo.

Market analysts questioned the solidity of the economist’s training, but Galípolo has so far shown himself to be aligned with the collegiate’s strategy. “The truth is that we don’t really know if Galípolo really believes in the things he said. We will only know his real profile when he has power in his hands. I hope his mask of heterodoxy remains well guarded”, says Inhasz.

Even with the pressure and the less balanced game of forces within the collegiate, Shikida is betting on maintaining Campos Neto’s firm stance throughout his last year in office.

“He will want to maintain his legacy. He has gained recognition and will not allow ‘the party to end’, nullifying his reputation for having acted correctly to maintain the value of the currency”, he states.

Among the highlights of his management, Campos Neto still has to present his contribution to modernizing the financial system, such as the launch of Pix and the development of Drex, the digital real.