Former Central Bank Chief Says Lula Missed Chance to Cut Rates

Henrique Meirelles, who ran Brazil's central bank for almost a decade, has suggested that President Luiz Inacio Lula da Silva stop talking about interest rates.

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. Meirelles said that the conditions were right for the bank to start easing monetary policy and that inflation expectations were converging to target. He also said that traders were betting a rate cut would come as early as March.

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

Meirelles said in an interview that Lula's remarks are rooted in an old school of thought that became known as the "new economic matrix" during the government of Dilma Rousseff. This matrix preaches that faster inflation allows for faster growth.

"History and experience show us that higher inflation actually lowers the growth rate," the former central bank chief said in his office in Sao Paulo. He added that this is something that we know from experience, not just from theory.

Meirelles, who accepted the job of central bank chief starting in 2003, disagreed with the president’s comments that a recently-approved law giving the bank autonomy to decide on monetary policy is “nonsense.” Meirelles had been promised freedom to set interest rates by Lula and feels that this law upholds that promise.

He said that the law is important because it limits what the president can do to complaining and trying to pressure the central bank into lowering interest rates.

Meirelles spoke out against Lula's questioning of the law, saying that it is unnecessary noise. He added that the law is here and we should never go back. Meirelles supported Lula's presidential campaign and was rumored to be on his short list for finance minister.

After much speculation, Fernando Haddad was named as the new head of Brazil's economy. Haddad is a loyalist to the Workers' Party, which has caused some frustration among investors who were hoping for a more market-friendly individual in the position. Lula's criticism of the central bank's autonomy has raised concerns about what may happen in 2024 when the current chief's mandate expires.

Meirelles expressed concern that the president may nominate someone who is willing to allow inflation to increase. He said he hopes this does not happen.

After Lula suggested that the central bank should allow consumer prices to rise by about 4.5% a year, questions emerged about the government’s commitment to its current inflation goals. Haddad later said that Brazil needs targets that are demanding but feasible.

Meirelles stated that altering the current price-increase objectives, which could occur during a National Monetary Council meeting in June, would be a very bad idea that would likely make inflation worse. The best solution, according to Meirelles, would be to leave the regime the same 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. This is after failing to reach the goal for two consecutive years.

Inflation has exceeded the tolerance range for seven years.

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. This rule limits growth of public expenditures to the inflation rate, providing much-needed stability for the Brazilian economy.

Although the current spending cap has been breached several times, Lula's government is expected to replace it with a less strict rule. Meirelles has said that 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.

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