Lula’s attacks on Brazil’s central bank alarm investors

Brazilian leader Luiz Inácio Lula da Silva has reignited investor concerns about his new left-wing government after repeatedly criticizing the governor of the country’s central bank and questioning whether the institution should remain independent.

“Is this country okay? is this country growing? Are people’s lives improving? No. So I want to know what independence was good for,” Lula said this month, referring to the official autonomy granted to the central bank in 2021 under Jair Bolsonaro’s previous government.

“I will wait for this citizen [bank president Roberto Campos Neto] to end its mandate so that we can assess what the independent central bank meant.”

Lula is irritated by the bank’s inflation target of 3.25 percent, which is too low by “Brazilian standards”. Lula believes the bank is hurting the broader economy by refusing to cut interest rates – now at 13.75 percent – faster.

“There is no reason that the interest rate is 13.75 percent. Will Campos Neto meet European inflation standards? We have to reach a Brazilian standard. An inflation rate of 4.5 percent in Brazil, from 4 percent, is a good thing when the economy is growing,” the 77-year-old said this week in one of his almost daily attacks on the bank.

The central bank declined to comment.

Elected last year on promises to end poverty and improve the quality of life for Brazilians, Lula is under pressure to deliver results, with forecasts suggesting Latin America’s largest economy will grow less than 1 percent this year.

But his attacks on Campos Neto, a widely respected technocrat, have already rocked the market and investors have revised upwards inflation expectations.

“In order to fight inflation, we need credibility in the institutions and this threat right now [from Lula] really backfires as interest rates and inflation expectations rise,” said Rafaela Vitoria, chief economist at Inter Bank.

Alessandra Ribeiro of consultancy Tendências added: “As the President speaks, he creates a lot of uncertainty. And there are immediate effects. Future interest rates go up, the exchange rate goes down, and the stock market goes down.”

Many fear Lula’s government resembles former left-wing President Dilma Rousseff, who urged the bank to align monetary policy with its political agenda and whose mismanagement of the economy was widely credited as a factor in Brazil’s deepest recession of 2014-2016.

Lula’s rhetoric was taken by allies as the green light for increased attacks on Campos Neto, with some suggesting the Senate should remove him from office for mismanagement. According to the provisions of the Central Bank Autonomy Act, the mandate of the bank president is to run until the end of 2024.

“Lula was elected President of the Republic by more than 60 million Brazilians. Who elected Campos Neto as governor of the central bank?” said Guilherme Boulos, a prominent left-wing lawmaker and Lula ally.

While Campos Neto’s removal is seen as an extreme — and unlikely — option, analysts say the Lula government has other methods it can use to influence policy changes at the bank.

“We know that for now the government respects central bank independence, but there are loopholes,” said Sérgio Vale, chief economist at MB Associados.

“One loophole, for example, is the inflation target, which the government can change. Another loophole is the possibility of the President gradually changing the members of the Copom Committee (which sets monetary policy) to become more heterodox.”

Luiz Fernando Figueiredo, a former central bank governor, said its independence is a “necessity” that lends credibility to its decision-making.

“So that technical decisions are not swept away by the waves of populism. The results so far are very positive. If the bank were not independent, we would have an exchange rate of more than six reais to the dollar and we would be facing a very sharp fall [economic] activity,” he said.

“If this criticism from Lula doesn’t abate, it will have an impact on the economy.”

Additional reporting by Carolina Ingizza