President Luiz Inacio Lula da Silva appointed his deputy finance minister to the board of Brazil’s central bank, sparking a selloff in local assets as the move was seen as intensifying his campaign against high interest rates.
(Bloomberg) — President Luiz Inacio Lula da Silva appointed his deputy finance minister to the board of Brazil’s central bank, sparking a selloff in local assets as the move was seen as intensifying his campaign against high interest rates.
Gabriel Galipolo was chosen to serve as monetary policy director, while Ailton Aquino dos Santos, a career central bank employee, was tapped as director of supervision, Finance Minister Fernando Haddad told reporters on Monday. Both need to be approved by the Senate before starting their mandates.
The Brazilian real lost 1.2% to 5.01 per dollar near the end of the trading session while short-dated swap rates fell as traders bet the nominations may tilt the balance of power at the monetary authority, hastening the beginning of a monetary easing cycle. The real led losses among emerging market currencies after the announcement.
It was central bank chief Roberto Campos Neto who suggested Galipolo for the position, Haddad said in Sao Paulo, adding that the presence of his right-hand man on the board would facilitate the “convergence” between the institution and the finance ministry.
“It will allow for more coordination and integration,” Haddad said. “We’ll be closer and make our point of view more clear for the central bank.”
Galipolo is considered by Lula allies as a potential replacement for Campos Neto when his term ends in December 2024. Dario Durigan will replace Galipolo as deputy finance minister, Haddad said.
“It’s not a total surprise,” said Luis Hurtado, a strategist at CIBC in Toronto. “Beyond the name, it’s a sign the government and the central bank are going to keep on confronting each other until there’s a clear signal the central bank will start to cut rates. Without a doubt it increases the headline volatility for the real.”
Alexandre de Azara, chief economist at UBS Brasil, said Galipolo would need to clarify his position on the so-called modern monetary theory, which asserts that some countries that borrow in their own currency shouldn’t be constrained by revenue to fund government spending.
“Since minister Haddad said he’s against the theory, it’s reasonable to assume Galipolo is also against it, but markets are afraid of such an experiment,” he said.
Hammering the Bank
Since taking office in January, Lula has hammered the central bank for holding Brazil’s key rate at a six-year high of 13.75%, alleging that it fails to curb inflation and instead drives unemployment. Campos Neto was tapped by former President Jair Bolsonaro, one of Lula’s biggest rivals. A onetime trader who is well known in financial markets, he has pledged to remain in his post until the end of his mandate.
Amid slim chances of convincing congress to back Campos Neto’s removal, the two board posts are Lula’s first opportunities to pick officials with a direct say on monetary policy. Two other board posts will open up in December.
Galipolo and dos Santos will serve four-year terms if they are approved by the Senate’s Economic Affairs Committee. The committee is preparing to consider the nominations “with urgency,” the body’s president, Vanderlan Cardoso, said before the announcement.
The central bank autonomy law establishes that, during their mandates, no board member can be fired unless authorized by senators, and only for extreme circumstances.
Policymakers led by Campos Neto have given no indication that rate cuts are imminent, instead saying “patience” and “perseverance” are needed before kicking off an easing cycle. They are battling expectations that consumer price increases will run above their targets through 2025.
Brazil’s annual inflation has eased significantly in recent months, falling back within the central bank’s tolerance range at 4.16% in early April. Still, core measures that strip out the most volatile items like food and energy are accelerating.
–With assistance from Maria Elena Vizcaino.
(Updates with market reaction, economist comment starting in third paragraph.)
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