Chilean minister defends independent BC – 03/08/2023 – Market

In a letter published by The Economist on March 3, Chile’s Minister of Finance, Mario Marcel, defended the independence of the country’s central bank, separating the Chilean government’s stance from that adopted by other leaders in the region, such as the President Luiz Inacio Lula da Silva (PT).

“Generalizing about economic or political issues in Latin America is always a challenge, since this is a particularly heterogeneous region”, writes the minister, who has chaired the Chilean central bank.

He, who participates in a left-wing government, commented on the report “Lessons from the Land of High Inflation” [“Lições da Terra da Alta Inflação”]published by the magazine on February 18, which discussed how leftist governments in the region have questioned the independence of their central banks.

The report that motivated the minister’s letter pointed out that, with only seven weeks in office, President Lula had a fight with the current direction of the Central Bank, calling the basic interest rate of 13.75% a year “disgraceful”. .

In the February report, the Economist recalls that Lula also declared that the independence of the Central Bank was absurd and suggested that the Senate keep an eye on the president of the Central Bank, Roberto Campos Neto.

The publication relates Lula’s position to that of other Latin American leaders, such as the Mexican Andrés Manuel López Obrador, who said that the Mexican central bank should also boost growth and not just control inflation.

“Although governments in Brazil have allowed the BC to operate largely autonomously since the country’s return to democracy in 1985, the bank was not formally granted independent status until 2021 under Lula’s predecessor, Jair Bolsonaro,” highlights the magazine. .

Lula’s criticisms generated noise in the financial market and were the target of censorship by analysts who defend the BC’s autonomy as an achievement of recent years.

But the president has also been supported in his criticisms by important economists, such as André Lara Resende, who criticize the current monetary policy. In a recent interview with the Canal Livre program, on TV Bandeirantes, Lara Resende said that the high interest rate, combined with negative bank balance sheets, could put the country into recession.

For the publication, the BC’s independence suffered during the Dilma Rousseff government, which pressured the institution to loosen monetary policy.

“I would like to point out that the Chilean government fully values ​​the 33-year independence of the Central Bank of Chile,” wrote the Chilean minister in his letter to the magazine.

“Neither our president, Gabriel Boric, nor any other government official has criticized monetary policy decisions since the current cycle began some 17 months ago.”

Chile ended last year with consumer inflation of 12.8%, the highest in 30 years. Interest is currently 11.25%.

According to Marcel, the current government has collaborated with the central bank in the fight against inflation, articulating one of the strictest policies in the world, moving from a global deficit of 8% of GDP in 2021 (still under the previous, right-wing government) to a surplus of 1.2% of GDP (Gross Domestic Product) in 2022.

“In my opinion, supporting independent central banks is not alien to progressive politics at all, given that inflation is a major source of economic inequality”, concludes Marcel.

The original Economist report recalls, however, that despite respecting the institution’s independence in Chile, President Boric unsuccessfully supported constitutional changes that attempted to expand the central bank’s mandate and would weaken the institution.

The Board of the Central Bank of Chile is made up of five members, who are appointed by the President of the Republic for a ten-year term. The president of the bank is appointed directly by the President of the Republic, and must always be one of the five members of the council. The term is five years or for the time remaining as director.

Since 2022, it has been chaired by Rosanna Costa, who has been on the board since 2017 and the first woman to lead the institution. Since 1989, the bank has been considered autonomous. The organic law was approved at the end of the dictatorship of Augusto Pinochet (1973-1990).