Lula Squandered Rate Cut Chance, His Ex-Central Bank Chief Says

Maria Eloisa Capurro and Josue Leonel
·4 min read
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(Bloomberg) -- Henrique Meirelles, who ran Brazil’s central bank for almost a decade, has a piece of advice for his former boss, President Luiz Inacio Lula da Silva: Stop talking about interest rates.

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Meirelles, who became the country’s longest-serving central bank chief during Lula’s first two terms in office, said conditions were given late last year for the bank to start easing monetary policy. Inflation expectations were converging to target and traders were betting a rate cut would come as early as March.

That’s all changed. Economists had already begun to steadily increase inflation forecasts to account for Lula’s plans of more social spending. But the mood soured completely after the president questioned the need for an independent central bank in a Jan. 18 TV interview, also suggesting consumer prices should be allowed to rise at a faster pace not to impede economic growth. Now, traders don’t anticipate a rate cut before September.

Lula’s remarks, Meirelles said in an interview, are rooted in an old school of thought that became known as the “new economic matrix” during the government of his anointed successor Dilma Rousseff, and that preaches that faster inflation allows for faster growth.

“Evidently we know by history and experience that it’s the opposite: higher inflation lowers the growth rate,” the former central bank chief said in his office in Sao Paulo, surrounded by flags of Brazil, the state of Sao Paulo, and his home state of Goias.

Read More: Lula’s Jab at Central Bank Puts Traders on Edge Across Brazil

Meirelles, who accepted the job of central bank chief starting in 2003 only after Lula promised to give him freedom to set interest rates, disagreed with the president’s comments that a recently-approved law giving the bank autonomy to decide on monetary policy is “nonsense.”

The law is important, he said, because now the president can’t do much more than complaining and trying to pressure the central bank into lowering interest rates.

“The law is here and we should never go back,” said Meirelles, who supported Lula’s presidential campaign and was rumored to be on his short list for finance minister. By questioning it, the president is creating “unnecessary noise,” he added.

The helm of Latin America’s largest economy was eventually given to Fernando Haddad, a Workers’ Party loyalist, frustrating many investors who expected a more market-friendly name in the position. Lula’s criticism of the central bank’s autonomy now raises a yellow flag for 2024, when the mandate of its chief Roberto Campos Neto expires.

“My concern is that the president will suggest someone willing to allow inflation to go up,” Meirelles said. “I hope that doesn’t happen.”

Inflation Target

Questions about the government’s commitment to current inflation goals — of 3.25% for 2023 and 3% for the next two following years — emerged after Lula suggested in the same TV interview that the central bank should allow consumer prices to rise by about 4.5% a year. Haddad, speaking to Valor Economico newspaper a few days later, said Brazil needs targets that are demanding but feasible.

Meirelles warned that any change to current price-increase goals, which could be decided in June during a meeting of the National Monetary Council, would be a “terrible mistake” likely to add fuel to the inflation fire. The best solution, he said, would be to leave the regime unchanged and “allow inflation to come down gradually.”

The central bank is expected to hold its key rate at 13.75% on Wednesday as it assesses whether keeping rates at a six-year high for longer will be enough to bring inflation to target, after failing to reach the goal for two consecutive years.

Spending Cap

Meirelles is also the father of Brazil’s current fiscal anchor, a constitutional rule approved in 2016 when he was finance minister under then-President Michel Temer that limits growth of public expenditures to the inflation rate.

While the ceiling has been breached several times and is expected to be replaced by a less strict rule by Lula’s government, Meirelles said a spending cap “creates the need for necessary reforms,” including a public-sector overhaul that could free up the budget for investment or social spending.

Regardless of what the new fiscal anchor will be, Meirelles said the government should focus on cutting expenses rather than bolstering revenue that it can’t control.

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