Lula government tests limits in unprecedented relationship with autonomous BC – 01/21/2023 – Market

The annoyance of Luiz Inácio Lula da Silva (PT) and his ministers with the high level of interest rates in Brazil has led the new administration to increase pressure on the Central Bank. The limits of the relationship are tested in the unprecedented scenario of a monetary authority commanded by names not indicated by the new government, and with autonomy for its functions.

On the other hand, the Central Bank has warned of problems that the expansion of expenditures may generate on inflation, especially in view of higher expenditures in 2023 and the high uncertainty about the rule that will replace the expenditure ceiling – which will be proposed by April, according to government forecast.

The exchange of messages between Lula, the members of the first echelon and the president of BC, Roberto Campos Neto, gained temperature in the last week and explained the divergences.

The president has gone public in recent days to criticize the actions of the monetary authority, to say that the autonomy of the autarchy is silly and to classify the current inflation target as exaggerated.

“It is silly to think that the president of an independent BC will do more than the BC did when the president [da República] he was the one who indicated it”, he said. “Why, with the BC independent, is inflation the way it is and the interest rate is the way it is?”.

The tension occurs because this is the first time that the BC’s autonomy is tested in the face of a government that did not appoint the directors. Until 2024, Lula will have to live with the holder of the autarchy appointed by former President Jair Bolsonaro (PL). Campos Neto, who has been in charge of the BC since 2019, has committed to staying in office until the end of his term and anticipated that he has no interest in a second one.

In force since February 2021, in the Bolsonaro government, the autonomy law determines fixed terms of four years for the president and directors of the BC, which can be renewed only once and do not coincide with that of the president of the Republic. The measure seeks to reduce political interference in the institution.

“We are going to experience for the first time a year in which we will have a new government together with a BC president appointed by the previous one. So, we will have a period of adaptation in which any movement may want to be signaled as some kind of message or divergence”, says Carla Beni, professor of MBAs at FGV (Fundação Getulio Vargas).

The PT’s recent statements represented an escalation in the tone against the BC, generated stress by putting pressure on interest rates negotiated by the market and forced the government itself to come out publicly and adjust its speech. It fell to Minister Alexandre Padilha (Institutional Relations) to say that the president will not act against the autonomy of the monetary authority.

Lula’s stance, however, is not isolated to the government, and the Minister of Finance himself, Fernando Haddad (PT), has been putting pressure on the autarchy with complaints about the level of interest rates. For him, the country is experiencing an “anomalous situation”, with “comparatively low inflation and an inappropriate real interest rate for an economy that has already been slowing down”.

In an interview with journalists on the 12th, he added that this is a “game” that the government is “learning to play”. “In the past there was no independence from the BC, now it exists, we need to understand”, said Haddad after presenting a package of measures to improve the public accounts, which he classified as a “letter to the BC”.

“We will [Ministério da Fazenda e BC] exchanging letters until the day we celebrate a greater understanding”, he said. The comment was made a few days after the Central Bank sent a letter to Haddad justifying the burst of the inflation target and saying that it follows with special attention the government’s policy to the tax area.

Despite the tone, the portfolio holder highlighted that he respects the independence of the municipality. “I don’t have to be satisfied or dissatisfied with the BC, I have to respect institutionality, respect the independence that was approved and seek ways to harmonize policies,” he said.

For Marcos Mendes, associate researcher at Insper and columnist for SheetHaddad is “exceeding the limits of his prerogatives and, repeatedly, seeking, through public speeches, to intimidate the Central Bank in order to induce decisions related to monetary policy”.

He points out that “it is up to the Minister of Finance to take care of fiscal issues without creating noise or political conflicts with the BC”, which, in his view, is acting within its competences. “I don’t see the president or the directors of the BC pronouncing outside the official documents on fiscal policy or anything else outside their purview”.

Luiz Fernando Figueiredo, former BC director, sees a convergence of interests after Haddad declared that fiscal and monetary policies need to act in harmony. “There are a lot of things open, but I don’t think there’s a short circuit,” he says.

The chairman of the Jive Investments board points out that the minister began his tenure in a fragile situation in the face of Lula’s statements about the existence of a conflict between fiscal and social responsibility, which were negatively received by the market.

“Haddad has to talk and do things that bring a sense of stability to the front. He’s doing it correctly, it’s better to talk more than talk less, but it’s no use talking to one side and doing to the other”, he says.

Former BC director Tony Volpon considers that the ideal would be for the finance minister not to enter into discussions on interest rates, citing the United States as an example. However, he recognizes that, in the case of Brazil, there is work to adapt on the part of “a leftist government to the idea of ​​having an independent Central Bank”.

For the economist, the tension between the government and BC may intensify in the coming months if there is frustration with the level of economic activity. If the deceleration scenario expected by the market is confirmed, he sees the government reviewing its perspectives as a “good” alternative and working to give the BC conditions to reduce interest rates in a responsible manner.

The “bad” alternative, in his opinion, would be for the government to blame the monetary authority, talk about changing the inflation target and “wanting to change monetary policy due to frustration with economic growth and the result of its fiscal policy”. .

“I believe that was a big part of the disaster of the Dilma government [Rousseff] in the economic area. Dilma was frustrated with the growth in 2011 and started to change a lot of things, including making a veiled interference in the Central Bank in 2012. .

Despite the conjecture, he does not see this as a “hired fight”. “For now, you can stay in this more friendly game”, he adds.

On Thursday (19), Campos Neto relativized Lula’s criticism of the BC’s formal autonomy, arguing that information is taken out of context in some interviews and putting the president’s statements into perspective.

“I think he [Lula] meant ‘I don’t think we need to have independence in the law, you can have independence without the law and make things work'”, said the BC president at an event at UCLA (University of California at Los Angeles).

“But when you think about what is happening in Brazil and how difficult the election process was in Brazil, I think the market would be much more volatile if the BC did not have autonomy in law. It would be another element of uncertainty”.