Pragmatic view: Campos Neto speaking at an event in New York City. According to Brazil’s central bank, the country runs the risk of losing credibility if the government changes its current financial targets. — Reuters
SAO PAULO: The Brazilian central bank has room to continue the process of lowering interest rates as inflation is well-behaved, even if it is still a bit above the target, says governor Roberto Campos Neto.
“Rates are so restrictive in Brazil that we can continue the process of lowering rates because, as inflation goes lower, real rates go higher. So we have space to lower rates and still be in a restrictive camp,” said Campos Neto.
After leading Latin America into an aggressive tightening cycle in the wake of the pandemic, the bank led by Campos Neto was among the first to begin relaxing monetary policy.
It has delivered three consecutive half-percentage point cuts since August, lowering the benchmark Selic rate to 12.25%, and envisions two more reductions of the same magnitude in the coming months.Annual inflation is picking up again, but core measures that strip out energy and food prices have continued to ease, and service cost increases are slowing.
Most analysts still see consumer price gains within the monetary authority’s tolerance range by December, which would mark the first time in three years that Campos Neto’s board delivers on the goal.
Earlier this year, the government reaffirmed a 3% inflation target through 2026, a key factor for rate cuts. The decision to loosen monetary policy only gradually has helped shield the Brazilian real from the turmoil seen in other emerging markets like Chile, where a weakening currency forced central bankers to adjust their pace of rate cuts.
“Brazil has improved in gaining credibility with the early cycle and taming inflation,” he said.
“Capital inflows have been very strong, with external accounts performing reasonably well.”
“When you look at Brazil compared with some of the more advanced economies, Brazil is very well developed, and that’s why the currency is very well behaved.”
Still, central bankers have warned that interest rates will remain restrictive amid global uncertainty.
Surging treasury yields and persistent inflation in advanced economies have led Campos Neto to remain cautious about signalling future cuts.
Current half-point rate cuts are an “appropriate” pace for the next two meetings, Campos Neto said.
“After that, it will depend on a lot of things. A lot of uncertainties will clear up between now and then,” he added.
Locally, a vigorous labour market and resilient retail sales point to a higher structural growth rate, he has previously said.
After a record harvest boosted exports earlier this year, Latin America’s largest economy is now showing initial signs of a slowdown, with activity expected to cool over the second half of the year.
That has generated concerns for President Luiz Inacio Lula da Silva, who took office in January pledging renewed economic prosperity.
Campos Neto has also repeatedly emphasized the risk that the government loses credibility if it changes Brazil’s current financial target.
Lula recently sent markets reeling after questioning his government’s goal of eliminating Brazil’s primary budget deficit in 2024, a key element of its efforts to shore up public financing.
“The government has the willingness to pursue the target, and pursuing the target is what’s relevant,” Campos Neto said.
Lula hammered Campos Neto and the central bank with a barrage of public criticism over the first half of the year. But the two met in September, in what was described as a constructive step forward in their often-tumultuous relationship.
Lula began his term attacking the bank’s governor in public speeches and interviews, and said he had no “commitment to Brazil” and often pointed to high rates as a key obstacle to his plans to restore economic prosperity.
“The president and the whole government now understand how technical the job has been,” Campos Neto said. “Price stability is very much coordinated with consumer confidence, so if you don’t have price stability, you have a lot of problems that, in turn, cause lower growth ahead.”
Campos Neto’s term as the bank’s president will end in December 2024, with Lula set to pick his replacement.
Arguments for a higher inflation target from the president and key members of his Workers’ Party have sparked analyst worries about the monetary authority’s tolerance for price increases going forward, and estimates for 2025 and 2026 have remained above goal for more than four months.
To policymakers, that partially reflects a perception that the bank will become more lenient. — Bloomberg
