Gallípolo at the Central Bank divides market opinion – 05/08/2023 – Market

The confirmation this Monday (8) that the executive secretary of the Ministry of Finance, Gabriel Galípolo, will be the government’s nominee for the Monetary Policy directorate of the Central Bank (BC) divided financial market analysts.

Despite being seen as a technical name with good transit in the government, part of the market considers that the indication is a sign of political interference in the monetary authority.

In addition, there is a consensus that the appointment of the secretary is a first step towards a Copom (Monetary Policy Committee), responsible for defining the basic interest rate, which is more lenient in combating inflation. Analysts, however, are divided on the timing and intensity of this transition.

The current level of interest rates maintained by the BC has been the target of criticism by the government, which has asked the Copom to reduce the Selic rate. When announcing the nomination, the Minister of Finance, Fernando Haddad, stated, however, that the secretary is not affiliated with the PT and that he will not represent the party’s thinking in the collegiate.

“As technical as Galípolo is, the market’s reading is that there is a bias on the part of the government to try to force a reduction in interest rates. The decision seems to be much more political than technical”, says Rodrigo Marcatti, economist at Vedha Investimentos.

“The indication goes against the market’s opinion of what could be better for the Central Bank”, he says.

He remembers, however, that the appointment of Galípolo to the board does not have the power to immediately change the decisions on interest rates, which have been taken by a large majority of the Copom collegiate.

Denilson Alencastro, chief economist at Geral Asset, claims to give Haddad and Galípolo the benefit of the doubt. “Now it’s up to us to monitor whether or not we will have some kind of political influence in the BC. I want to believe that we won’t; the BC presided over by Roberto Campos Neto has been very technical, and the tendency is for this to continue”, he said, citing Galípolo’s track record in the financial market as a positive factor.

The current executive secretary of the Treasury was president of Banco Fator from 2017 to 2021 and has already been in the opposite field to the PT. The economist acted in the modeling of the sales of the two state-owned companies, Cesp and Cedae, which took place under protest from PT members.

Analyst Flávio Conde, from Levante Investimentos, considers the indication positive, noting that the economist could defend another point of view for the definition of interest rates in Brazil.

“I found the indication coherent and responsible. Galípolo has good contact with the entire government and could contribute to discussions on the course of monetary policy already at the next meeting. He should take a different view from the current one, which is very rigid, inflexible and focused on bring inflation to the target”, says Conde.

In this sense, Rodrigo Marcatti says that Galípolo’s appointment can serve to appease the exchange of barbs between the BC and the government.

“Galípolo’s participation in the board may make Haddad more aligned with the BC, reducing attacks between the government and the monetary authority and, with that, making speeches more unison”, he says.

In addition to confirming the name of Galípolo, Haddad said that Ailton de Aquino Santos, a career civil servant at the BC, will be appointed to the Board of Inspection at the body. Both nominations are yet to be considered by the Senate.

President Luiz Inácio Lula da Silva (PT) will still have two more vacancies this year to nominate to the BC, for the directorates of Relationship, Citizenship and Conduct Supervision and International Affairs and Corporate Risk Management.

Thus, for many economists, Galípolo’s appointment is just one step in a broader and slower change in the central bank’s monetary policy bias.

“I don’t think that the Galípolo is going very much towards that ideological side and is aware that you can’t just lower the interest rate at this moment. But, although the majority of the Copom is still with a more cautious mind, until the end of the year the government has more names than it will announce. And, if the government wants a majority in the Copom, it is because the government wants another face for the Copom”, said Rafael Pacheco, economist at Guide Investimentos.

Some economists are more pessimistic, interpreting Galípolo’s confirmation as a direct political interference in the Central Bank, which is autonomous, and predicting more immediate changes in the way interest rates are managed.

“I think his indication goes along the lines of not having such an independent Central Bank in practice in the coming years; what we are seeing now, which is really an independent Central Bank, should disappear”, said Gustavo Cruz, chief strategist of RB Investimentos, which is part of the wing of the market that sees Galípolo as the probable next president of the BC.

Alexandre Schwartsman, economist and former director of International Affairs at the Central Bank of Brazil, compared the government’s possible intention that Galípolo be Campos Neto’s successor to the rise of former BC president Alexandre Tombini within the autarchy. Tombini headed the institution during the administration of then-president Dilma Rousseff, from January 2011 to mid-2016.

“If history serves as a guide, such an appointment reveals the government’s intention to place a subservient president in the Central Bank, someone who, like Tombini, is prepared to direct monetary policy towards objectives other than the inflation target,” said Schwartsman, who was a director during the first Lula administration.

This Monday, the dollar rose and returned to the level of R$ 5.00, accelerating gains after confirmation of Galípolo’s nomination. The Stock Exchange, in turn, rose driven by companies in the commodity sector, such as Petrobras and Vale.

With Reuters