Lula vs the central bank: tensions on the rise

The tight monetary policy adopted by the Brazilian central bank is angering President Luiz Inácio Lula da Silva and could have an adverse effect on the economy.

In recent days, Lula has ramped up his criticism of central bank governor Roberto Campos Neto after the bank decided to keep the Selic interest rate unchanged at 13.75%. In its post-decision statement, the monetary authority said the rate is likely to remain high for a prolonged period because of the persistent inflation pressures and the government's increased fiscal spending strategy.

"Targeting the central bank because of high-interest rates is fighting the problem the wrong way. Brazil has a scenario of persistent inflationary pressure, among other reasons, because there are no signs of controlling public spending," Flavio Serrano, an economist at local asset management firm BlueLine, tells BNamericas. 

Lula told reporters that Campos Neto "owes no explanations to me, but rather to the national congress that appointed him. He has the opportunity to mature, to think about how he is going to take care of this country." 

The president also compared the current central bank governor unfavorably to Henrique Meirelles, who headed the central bank from 2003 to 2011, when Lula served his first two terms as head of state. " At that time, it was easy to blame the president. Not now. The central bank is to blame. Now it's the senate that can change the central bank governor." 

Since 2021, Brazil has had an independent central bank, with bank directors serving for a fixed term and having decision-making autonomy to avoid political interference in monetary decisions. Lula has also suggested that congress should review the model of central bank autonomy.

Campos Neto was appointed during the administration of former president Jair Bolsonaro at the start of 2019 and is expected to remain in the post through 2024.

"The main reason for the central bank autonomy is to disconnect the monetary policy cycle from the political cycle because they have different plans and interests," Campos Neto said during a speech in the US this week.

In the midst of Lula's shots at the central bank, the leftist party PSOL, which is part of the ruling coalition, submitted a bill in the lower house of congress to try to revoke the central bank's autonomy.

However, that could have some serious knock-on effects. 

"If congress interferes with the central bank's autonomy, market agents will make upward revisions of their inflation forecasts at the same time, as they will see a clear political pressure on the monetary authority. Inflation expectations among market agents are one of the elements that generate price pressures in the long term," says Serrano.

The high level of the Selic base rate is considered one of the main factors responsible for the lackluster economic activity expected this year in Brazil. The economy is forecast to have grown 3% last year, but GDP is only predicted to rise 0.79% this year, according to the most recent weekly central bank survey of 100 analysts.

"Lula is already trying to protect himself from a weaker economic result for this year, showing the population that the blame for a low-growth economy is not his, but that of the central bank," André Pereira Cesar, a political analyst at Hold Consultoria, tells BNamericas.

"Lula also sees Campos Neto as someone linked to former president Bolsonaro and believes that, by being in charge of the central bank through 2024, he could cause a lot of damage to the current administration in economic terms."