Reuters – Statements by the head of the Central Bank, including on the impact of looser public accounts and the abandonment of monetary policy guidance, soured relations with the Ministry of Finance, until then its biggest partner in the Executive Branch.
Three ministry officials, who requested anonymity to discuss personal opinions, said they interpreted BC president Roberto Campos Neto’s recent comments as a deliberate move to adopt a harsher tone with the left-wing government preparing to replace him. at the end of the year.
CONTINUES AFTER AD
The growing tensions may anticipate the noise surrounding this transition — the first under law that grants operational autonomy to the BC — reinforcing expectations that, to replace the current head of the monetary authority, a name of extreme trust and good standing with the president will be chosen. Luiz Inácio Lula da Silva and his economic team.
When Campos Neto was criticized by Lula at the beginning of last year for high interest rates, it was Finance Minister Fernando Haddad who brokered meetings and lowered the temperature.
CONTINUES AFTER AD
However, Campos Neto’s latest signaling of a possible less intense interest rate cut and attacks on Brazil’s fiscal discipline during a marathon of public events in Washington last week caught the Finance Ministry by surprise, potentially burning bridges there.
A ministry source said the stance of Campos Neto, who was appointed by Lula’s right-wing predecessor Jair Bolsonaro, had become “political”. Another called it “unusual.”
CONTINUES AFTER AD
The BC and the Ministry of Finance did not respond to requests for comment.
At an event with investors last Wednesday, open to public broadcast just a few hours before it began, Campos Neto indicated for the first time the possibility of a smaller interest rate cut while outlining conjectures for the future against the backdrop of greater uncertainty global. He cited both higher-than-expected U.S. inflation and concerns about the government loosening its 2025 fiscal target.
CONTINUES AFTER AD
A source from the Ministry of Finance complained that similar considerations about interest rates in the US remaining high for longer shook the markets in September and October without such a dramatic reaction from Campos Neto who, at the time, chose to highlight that the relationship with politics Brazilian monetary policy was not automatic, making it necessary to evaluate the transmission channels for inflation, in particular the exchange rate.
Another source from the ministry stated that the statements were made in the heat of the moment, without there being visibility on how permanent the consequences of the scenario would be for the Brazilian currency.
CONTINUES AFTER AD
After a few days, the real recovered part of its losses this month, but on Monday Campos Neto highlighted that, given the uncertainties, the monetary authority was prevented from providing future guidance for monetary policy.
In March, the BC had shortened this “guidance” by signaling that it planned another 0.5 percentage point cut at its next monetary policy meeting, and no more for future meetings, in the plural.
CONTINUES AFTER AD
Distrust had already been growing in the Treasury, sources said, since Campos Neto began openly advocating earlier this year that parliamentarians approve a constitutional amendment granting financial autonomy to the BC.
The proposal would add an even greater degree of freedom for the institution after the 2021 law staggered the terms of office of the presidents of the Republic and the heads of the Central Bank. Given the implications of the proposal for the BC’s relationship with the Treasury in various areas, senior officials at the Ministry of Finance were dismayed that Campos Neto had not previously presented the topic to Lula and his team.
NEW INTEREST BETS – Despite Lula’s barrage of criticism and his suggestions that Brazil should adopt a higher inflation target, public relations stabilized in mid-2023 with Campos Neto, who participated in a barbecue with the presidential office at the end of the year past.
The government chose to maintain the inflation target at 3% from 2024 onwards, which helped reduce expectations for the evolution of consumer prices, paving the way for a cycle of monetary easing that began in August and which reduced the Selic by 3 percentage points so far, to 10.75%.
With the next monetary policy meeting in two weeks, future rates now price in about a 90% chance of a 0.25 percentage point cut in May, breaking the streak of 0.5 point reductions.
Lula said this week that he hoped Campos Neto would take into account that “Brazil is not at risk,” adding that he was evaluating whether to announce his successor in advance.
So far, two main candidates have emerged for the position. Gabriel Galípolo worked as Haddad’s deputy at the Ministry of Finance before becoming director of monetary policy at the BC in July.
Paulo Picchetti, director of international affairs at the bank, has been friends with Haddad since they both completed their master’s degrees in economics at the University of São Paulo in the early 1990s.
When releasing a package of measures to stimulate credit this week, Haddad said that Galípolo continued to collaborate with various elements of the Treasury’s agenda since taking on his new position, showing that it is not because he has autonomous work at the BC “that we need feel bad.”
Galípolo’s ties with Haddad continued to be cultivated after his move to BC: the director hitched a ride on Brazilian Air Force (FAB) flights with the minister from Brasília to São Paulo and participated in several informal meetings at the ministry’s office in capital of São Paulo, even entering through the private entrance, according to two other sources.
Unlike Picchetti, Galípolo also has ties with Lula that are independent of his relationship with Haddad due to his connection with economist Luiz Gonzaga Belluzzo, his long-time academic partner, who has served as the president’s advisor for years.
Tags: Campos Neto irritates Treasury signs change rate interest cuts attacks government
--
