Brazil is poised to give its central bank independence from political control in a move spearheaded by the bank’s US-educated president Roberto Campos Neto to shore up its reputation with international investors.
Legislation to implement the change was pushed through Congress’s committee stages last week and is expected to face a full parliamentary vote in the coming weeks.
Brazilian president Jair Bolsonaro’s administration is pushing ahead with efforts to reform the economy through a sweeping programme of market liberalisation, debureaucratisation and deregulation — offering Mr Campos Neto a window to push for the change.
Brazil’s central bank at present sits under the economics ministry, with its head appointed by the nation’s president. Under the new proposal, the bank’s chief would be legally protected from being fired by the government over differences on monetary policy. The bank president, who would form part of a collegiate board of eight directors, would be entitled to a four-year term that could be renewed once.
Central bank independence has been discussed on and off in Brazil for three decades. Although already considered de facto independent, the bank lost the confidence of investors during the administration of former leftwing president Dilma Rousseff, who many believe pressured the bank to use monetary policy to pump the economy.
Experts say legal independence would improve Brazil’s broader investor rating and solidify the bank’s credibility under Mr Campos Neto, a former trader who became president of the institution last year.
“Central bank independence is a kind of insurance policy that no matter what happens with this [political] administration or with the world economy, the bank will be able to maintain its focus on monetary and financial stability,” said Carlos Braga, a professor at the Dom Cabral Foundation. “Our inflation target mechanism and the capacity to send signals to the market is very much influenced by the ability of the central bank to be perceived as an independent institution.”
After decades of fluctuating economic fortunes that often provoked government interventions, Brazil is enjoying a rare period of tranquility; inflation is muted at about 4 per cent and growth is forecast to run at more than 2 per cent this year. That offers a useful opportunity to make the change, some observers say.
“This is the ideal time for independence of the central bank. We are living a historic experience of economic recovery with low inflation [and] expectations well anchored,” said Carlos Langoni, a former central bank president and director of the World Economy Centre at the Getúlio Vargas Foundation. “[And] there should not be any political reason for not giving them full independence. I am convinced Congress will approve this reform.”
Such a structural reform would aid Brazil’s push to join to OECD, Mr Langoni added; the club of rich countries mostly have independent central banks. Mexico and Chile — the only Latin American members of the OECD — have both granted autonomy to their central banks.
Politically, the bill is well-positioned. Rodrigo Maia, the powerful speaker of Brazil’s lower house of Congress, has backed the legislation and said he expected a vote immediately after the nation’s Carnival holidays this week.
For his part, Mr Campos Neto has already begun lobbying lawmakers. In a meeting earlier this month, he urged Congress to have the “courage” to pursue this “necessary” reform.
Some leftwing legislators argue, however, that the bank should expand its mandate to focus on spurring growth. At present the bank’s prime objective is the control of inflation and financial stability.
“What is being done makes sense from the liberal point of view of [economy minister] Paulo Guedes. But the objective of tackling inflation alone is out of fashion. That trend has passed,” said Ernani Torres, a professor of economics at the Federal University of Rio de Janeiro.
“The objective of the central bank should be broader and should be negotiated in a flexible way so that the bank can respond to all purposes.”
Such concerns were highlighted earlier this month when an initial vote on the bill was postponed because lawmakers tried to add new responsibilities, including economic growth and full employment, to the bank’s mandate. The attempt eventually failed.
“There is a fear that with full independence, the central bank will not take care of growth and will only target inflation,” said Mr Langoni.
“That is nonsense. In the mid and long term, if you have stabilised inflation it will help sustain a higher growth potential.”
Additional reporting by Carolina Pulice