Former head of the US Treasury defends central bank autonomy – 03/31/2023 – Market

Amid questions from the Luiz Inácio Lula da Silva (PT) government about the independence of the Central Bank, former US Treasury Secretary Larry Summers defended this Friday (31) the institution’s autonomy and said that attacking it is a “foolish game”.

“The best way yet found to guarantee relative price stability, which is a kind of anchor for social cohesion, is the independence of central banks,” he said in a speech on development opportunities in Latin America during the Brazil Conference, event organized by students from Harvard and MIT (Massachusetts Institute of Technology) universities, in Cambridge, in the Boston area, in the USA. Summers is president emeritus of Harvard and addressed the event via video.

Summers asserted that “politicians need to be convinced that attacking the central bank is a foolish game”, because “the bank doesn’t listen”, but “the markets listen, and so rates [altas de juros] they elongate,” he said. “What happens to central banks is ultimately a test case for the success of governments,” he said.

Lula and part of his team opened fire against the president of the Central Bank, Roberto Campos Neto, for maintaining the country’s interest rate, currently at 13.75% per annum.

Summers said he does not remember another period “with as many concerns” as the current one, with perennial inflation around the world, climate change, geopolitical challenges such as the Ukrainian War and the Covid-19 pandemic.

“It is a moment of crises and challenges, but also of great opportunities”, he said, noting that Brazil is at the center of the discussion. Summers argued that it is necessary to think about regional development, not just local development, and that he does not see a scenario in which Brazil and the United States grow at disparate levels.

At least one of these challenges must be lighter in Latin America, in the view of the president of the Inter-American Development Bank, Ilan Goldfajn, who spoke next: the banking crisis.

According to him, financial systems in Latin America are more stable and resilient to global shocks due to the region’s history of turmoil. “It’s a region more adapted to these side effects than other places that haven’t experienced so many shocks, so many changes, so much inflation, so much interest rate volatility,” he said.

According to Ilan, the shocks in the financial system, with the bankruptcy of the Silicon Valley Bank in the United States and the Credit Suisse crisis in Switzerland, are side effects of the tightening of monetary conditions, with high interest rates to combat inflation. “This creates more difficulties for intermediation, because often you keep your assets at a certain yield, and you have to remunerate your liabilities, what people deposit, at a higher rate”, he said.

Ilan summarized the challenges facing Latin America today in three: increased demands from society, with the struggle to reduce social inequalities, not only in terms of income but also gender and others, which generates a wave of dissatisfaction and protests; fiscal restrictions, with governments with fewer resources to meet these demands; and low economic growth, with the region growing at an average rate of 2%.

A fourth problem is becoming increasingly important, he said, that of climate change, with extreme droughts, floods and disasters such as hurricanes in countries in the Caribbean. “Policy makers and policy makers deal with the triple challenge of social, fiscal and growth, but also the consequences of climate change,” she said.

For the president of the IDB, although the region has this series of conjunctural and structural challenges, it is also necessary to see the region as part of the global solution.

One of the areas in which Latin America can be useful is food security, he defended, since the region is responsible for 40% of the world’s food trade, according to him, and has a third of the planet’s fresh water. Ilan stated that it is possible to multiply the region’s production by eight and produce enough food for 10 billion people.

The other field is energy security. According to the economist, 30% of the energy consumed in Latin America comes from clean sources, and in Central America this total jumps to 80%. The region has two of the world’s three “carbon negative” countries, Suriname and Panama, which absorb more carbon emissions than they produce. In addition, two-thirds of the world’s stocks of lithium, a key mineral for the manufacture of electric cars, are produced in the region, he says.