Brazil’s Central Bank: A New Era of Cooperation?
As Brazil’s central bank prepares for a change in leadership, investors are holding their breath. Gabriel Galipolo, a former deputy finance minister, is set to take the reins on Wednesday, marking a significant shift in the institution’s dynamics.
A New Chapter in Central Bank Relations
Galipolo’s appointment is expected to bring a sense of calm to the often-turbulent relationship between the central bank and President Luiz Inacio Lula da Silva. The former deputy finance minister has built a reputation for his economic views, which sometimes diverge from those of his predecessor, but align with the left-leaning politicians.
However, this newfound harmony may come at a cost. Six former central bank directors have expressed concerns that Galipolo’s appointment could test the institution’s formal independence, which was established in 2021 to boost its autonomy.
A Market Meltdown Averted?
The handoff comes at a critical time, following a market meltdown triggered by frustration with government spending plans. Brazil’s risk premium surged, and its currency plummeted to all-time lows. Galipolo’s predecessor, Roberto Campos Neto, had been at odds with Lula over high interest rates, leading to months of tension.
A Promise of Continuity
Despite their differences, Galipolo and Campos Neto have pledged continuity and downplayed their disagreements. Lula has also vowed fiscal discipline and a hands-off approach to the central bank, praising Galipolo in a social media video.
Monetary Policy Shift Ahead?
However, concerns remain about a potential shift in monetary policy. Galipolo and three other Lula appointees voted for a larger rate cut in May, sparking speculation about a more dovish approach. Starting in January, Lula’s picks will hold seven of the nine seats on the central bank’s rate-setting committee.
Economists Remain Skeptical
Despite the united front and hawkish rhetoric from Galipolo, some economists remain unconvinced. “The forward guidance was issued precisely because there are concerns,” said former central bank director Alexandre Schwartsman. “It’s a symptom, a recognition there are serious doubts about how (Galipolo) will behave, whether he will truly be independent or not.”
A Long Shadow Looms
The legacy of Alexandre Tombini, the last central bank governor appointed by Lula’s leftist Workers Party, still casts a shadow. During his tenure, the central bank cut rates and kept them low, despite inflation rising above target. Many economists criticized Tombini for ceding to pressure from then-President Dilma Rousseff, contributing to Brazil’s worst recession in decades.
A Different Path Ahead?
Lula’s allies point to his relationship with Henrique Meirelles, whom he tapped to run the central bank during his first two terms. Meirelles is confident that Lula will respect the central bank’s independence, as he did in the past.
Brazil’s Surging Debt
However, Brazil’s surging public debt remains a major concern. The Treasury forecasts the country’s gross debt will climb to 81.7% of GDP by 2026, exceptionally high among emerging-market peers.
A Delicate Balance
With less than two years until the next election, Lula is under pressure to deliver economic growth. Relations with Campos Neto were strained from the start, but Galipolo’s appointment may have swung too far in the other direction. The real challenge for Galipolo will come when the central bank needs to maintain its position as the economy cools and unemployment rises – a more sensitive issue for a left-leaning government.
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