Political pragmatism versus economic impatience? : Lula’s attacks on the Central Bank of Brazil are already worrying international investors

The President of Brazil, Luiz Inacio “Lula” da Silvawho has just met at the White House the American PresidentJoseph Bidenachieving in just 40 days the photo with the North American President who Alberto Fernandez would not have been able in more than 3 years of management, at the same time to deepen his crusade against the independence of the Central Bank of his country, which compromises the credibility of the institution to continue to lower the inflation rate of the country, after almost 11% per year that it had reached in the middle of last year.

Lula thus mixes a dose of political pragmatism with another of impatience and probable economic populism by undermining the confidence in the stability of the president of the Brazilian Central Bank, Roberto Campos Netoa well-respected professional who has succeeded in recent months in substantially reducing inflation, but whose continued power now seems to be in question by Lula and his main allies in Congress.

“Lula was elected president by more than 60 million Brazilians, who elected Campos Neto? (Guilherme Boulos, deputy and political ally of the Brazilian president)

Basically, Lula says that with the current “benchmark” Selic rate for monetary policy, at 13.75% per year, Brazil will not be able to grow any further. “It is not possible for the country to develop again at this rate,” the Brazilian president said in an interview with “alternative” media, adding that “this citizen” – as he hostilely called Campo Neto – ” should explain to Congress”.

Lula also recalled that Campos Neto was elected by the Senate and has the opportunity to mature, reflect and know how to take care of this country. It’s not exactly a reassuring reference. A few days before, during the inauguration of Aloizio Mercadante, an economist linked to the PT, Lula’s left-wing party, as president of the National Bank for Economic and Social Development (Bndes), Lula called the Selic rate of 13.75% “shameful”. Shortly after, the deputy Guilherme Boulos, of the Socialism and Freedom Party (PSOL), an ally of the president, asked, rhetorically. “Lula was elected president by more than 60 million Brazilians, who chose Campos Neto? Moreover, he described the respected official as an “infiltrator” of the former president. Jair Bolsonaro.

At 77, Lula wants the economy to grow strongly – this year he will hardly do so – and he is impatient with the Central Bank’s reluctance to lower the Selic rate, since he is maintaining an “inflation target” of 3.25% per year. “There is no reason to maintain the rate at 13.75%. Campos Neto wants standard European inflation. We must aspire to the Brazilian norm: an inflation of 4 or 4.5% is good if the economy is growing,” insisted Lula.

So much pressure and questioning of Campos Neto and the independence of the Central Bank (established in 2021) worries international investors and analysts, as has already been echoed by the Financial Times, the influential financial, economic media and international politics, which pointed out this Saturday that Lula’s conduct has raised the alarm bells among investors.

“If the Central Bank was not independent, he warned, the dollar in Brazil would already be worth more than 6 reais and economic activity would fall sharply” (Luiz Figueiredo, former director of the Central Bank)

“To fight against inflation, you need credibility in the institutions; this threat from Lula plays against it: now interest rates and inflation expectations are rising,” he said. rafael victoria, interbank economist. AND Alessandra Ribeiro, from the consulting firm Tendências, also quoted by the FT, added: “Since it is the president who speaks, this generates a lot of uncertainty and there are immediate effects: interest rates rise, the real depreciates and the stock market goes down. Indeed, adds the British newspaper, many fear that Lula’s third government will resemble that of Dilma Rousseffwhich also pressured the Central Bank to adapt monetary policy to its political agenda and whose mismanagement of the economy was one of the causes of the recession between 2014 and 2016, the deepest in the history of the Brazil.

While Lula said he would wait for Campos Neto to complete his term, which expires at the end of 2024, he also questioned the usefulness of an independent central bank protected from political pressure. For this reason, an impeachment is considered unlikely, but at the same time, the presidential interrogation is a green light for attacks by his allies. Moreover, he said Serge Valechief economist at MB Asociados, another consultancy, the government could take an intermediate step, such as changing the Central Bank’s “inflation target” through the Monetary Policy Committee, despite figures such as Luiz Fernando Figueiredoa former director of the institution, affirms that these are “technical decisions which must not be swept away by a wave of populism”.

If the Central Bank was not independent, he warned, the dollar in Brazil would already be worth more than 6 reais (the current price is 5.22) and economic activity would fall sharply. “If Lula’s criticism does not subside,” he said, “it will have an impact on the economy.”

Lula’s impatience and threat of economic populism contrasts with his political pragmatism, reflected in his recent visit to the United States, to establish a direct relationship with Biden.

Historically, Brazilian foreign policy has been neutral and in fact Brazil is one of the founding members of BRICS, which initially brought together Brazil, Russia, India and China and later South Africa. Even so, in 2009, when meeting him, Obama, after meeting Lula, said “I love this guy, he’s the most popular politician on earth.”

This third-party pragmatism will be more difficult to maintain in a global geopolitical confrontation between the United States and China. As an editorial in The Economist recently reported, last November, when Bolsonaro was still President of Brazil, Biden announced that the US Financial Development Corporation would invest $30,000 million in mining company TechMet to produce nickel and cobalt in Brazil, two of the “critical minerals” of the so-called “energy transition”.

In May last year, still as a candidate, Lula said that the President of Ukraine, Volodimir Zelensky, was “as responsible” for the war with Russia as the invader Vladimir Putin. But a few days ago, after receiving a visit from the German Chancellor, Olaf Scholz (who had visited Argentina hours earlier), said Putin had “made a mistake” in invading Ukraine.

Lula recently entered the White House because he is reliable for Biden: that he is a partner of Xi Jinping and Putin in the BRICS, does not imply that he accepts the tragic history of the Chinese Communist Party and even less that he proposes Brazil as Russia’s gateway to Latin America, as did the president of argentina Alberto Fernandez.

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