Lula escalates attacks on Campos Neto while government and BC wave a truce

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President Luiz Inácio Lula da Silva (PT) opened this Tuesday (7) a new front of pressure on the Central Bank by asking for the vigilance of agents who can act to dismiss the president of the monetary authority, Roberto Campos Neto. Other members of the government, against the petista, seek to lower the tone of the speech.

Lula stated that the Senate, which may approve the dismissal of the president of the Central Bank after the government’s request, should monitor the performance of the autarchy. And he said he hopes that ministers Fernando Haddad (Finance) and Simone Tebet (Planning) are also monitoring the situation.

Haddad and Tebet make up the CMN (National Monetary Council), which can initiate the process of exonerating the president of the autarchy. The body, composed of three votes (the third being the head of the Central Bank), can forward such a request to the President of the Republic in the event of “proved and recurrent insufficient performance to achieve the objectives” of the monetary authority – according to the law. of autonomy, approved in 2021.

“In that time [mandatos anteriores], it was easy to blame the President of the Republic. Not now. The Central Bank is to blame. Now, it is the Senate that can change the president of the Central Bank,” said Lula this Tuesday.

Lula has already stated that he encourages speeches against the Central Bank as a form of pressure against the current level of interest rates, which he considers high. According to the petista, the “business class needs to learn to demand, to complain about high interest rates” and he, as president, should also complain.

Lula’s strategy, however, has caused stress in inflation expectations and put pressure on interest rates negotiated in the market, causing long-term rates to rise – causing the reverse effect to that advocated by the president.

Despite Lula’s tone, ministers and allies have acted to soften the speech and wave in the direction of conciliation. A Sheetthe leader of the government in Congress, Jaques Wagner, stated that the president only reverberates what the majority of the population would think about the level of interest rates – but that the government will respect Campos Neto’s mandate.

The perception of Lula’s economic team, since the presidential campaign, is that any change related to the BC would demand an intense use of political capital, given that the government has a series of other priorities in the economic area.

Among the challenges, the approval this year of a complex tax reform that affects the interests of states, municipalities and different sectors. In addition, the government needs to discuss with parliamentarians this year the new fiscal rule that will replace the spending ceiling – which prevents the real growth of federal expenses.

In addition, the first signals from the Senate point to difficulties surrounding a possible initiative against Campos Neto. Senator Renan Calheiros (MDB-AL), a close ally of Lula, defended an “approximation of positions” between the government and BC.

“I think it is very important to find a common denominator and see how these positions are brought together. The economy is predictability, any tension implies a certain result”, he said after a meeting at the Ministry of Finance on economic measures being discussed in Congress. According to him, it is better to “help solve the problem”.

Senator Rogério Marinho (PL-RN), former minister of Jair Bolsonaro (PL) and who recently ran for president of the House, criticized the attacks on the BC’s autonomy and said that Lula wants to find a justification for an eventual economic failure. “We will do our part in the Senate to defend the country’s structuring achievements,” he said on a social network.

Jorge Kajuru, leader of the PSB in the Senate, said that Campos Neto must be summoned to give explanations. “Instead of being independent, [Campos Neto] demonstrates that it has a side. A Bolsonarist side, from the extreme right “, said the senator. “He demonstrates that he wants to harm the Lula government “, he said.

In his first public statement since Lula’s attacks intensified, Campos Neto defended the institution’s autonomy on the grounds that independence results in a better cost-benefit ratio for the country’s interest rate policy.

“The main reason, in the case of Central Bank autonomy, is to disconnect the monetary policy cycle from the political cycle because they have different lenses and different interests,” said Campos Neto at an event in Miami, in the United States.

“The more independent you are, the more effective you are and the less the country will pay in terms of the cost-effectiveness of monetary policy.”

In that time [mandatos anteriores], it was easy to blame the President of the Republic. Not now. The Central Bank is to blame. Now, it is the Senate that can change the president of the Central Bank

The BC’s formal autonomy has already been criticized by Lula on several occasions and even called “nonsense” by him.

The petista said that he could review the autonomy after 2024, when Campos Neto’s mandate ends – appointed to the position by former president Jair Bolsonaro (PL).

“I want to know what independence was for. I will wait for this citizen [Roberto Campos Neto] end his term for us to make an assessment of what the independent BC meant”, said Lula in an interview with RedeTV!.

The more independent you are, the more effective you are and the less the country will pay in terms of monetary policy cost-effectiveness.

The declaration was made one day after the Central Bank announced the maintenance of the basic interest rate (Selic) at 13.75% per year for the fourth consecutive time, in the first meeting since Lula took office.

In the statement, the BC collegiate had raised the tone with warnings about fiscal uncertainties and the worsening of inflation expectations, which are moving away from the target in longer terms. The messages provoked an escalation in the tension between the government and BC.

This week, Haddad publicly revealed his dissatisfaction with the BC by saying that the post-Copom monetary authority note could have been “a little more generous” after the measures announced by the PT management to improve public accounts.

This Tuesday, the minister read the minutes of the meeting as a positive sign. In the document, the BC collegiate stated that, although it only works in its scenarios with policies already implemented, the execution of the package that promises a fiscal improvement of R$ 242.7 billion could reduce the pressure on inflation.

“Some members noted that the medians of the primary deficit projections of the Pre-Copom Questionnaire (QPC) and the Focus survey for the year 2023 are significantly lower than the forecast in the federal budget, possibly incorporating the fiscal package announced by the Ministry of Finance “, he said.

“The Committee maintained its usual governance of incorporating the policies already approved by law, but recognizes that the execution of such a package would attenuate the fiscal stimuli on demand, reducing the risk of an increase in inflation”, added the text.

In another part of the document, the BC pondered that “it will be important to monitor the challenges in its implementation”.

The Minister of Finance classified the document disclosed by the Central Bank as “more friendly”. “The Copom minutes came out better than the communiqué. A more extensive, more analytical minutes, making important points about the work of the Ministry of Finance. A more friendly minutes in relation to the next steps that need to be taken”, he stated.

The perception of some economists is that this gesture may represent the “raising of a white flag by the Central Bank”. Tony Volpon, former director of the institution, wrote on his social networks that a communication effort in conjunction with the minutes could perhaps avoid “the dangerous crisis” that was being contracted.

Alberto Ramos, director of the macroeconomic research group for Latin America at Goldman Sachs, sees the BC’s mention of the government’s fiscal package as a “diplomatic gesture”.

“It looks like a balanced minutes, it was a polite gesture, it was a diplomatic gesture, but I don’t think it was a technical conclusion because the package, in my opinion, is relatively weak and we’ll see how the implementation will be”, he said.

Even so, Mauricio Oreng, superintendent of macroeconomic research at Santander, recalls that the minutes reinforce the BC’s intention to continue keeping the Selic at the current level of 13.75%, adjusting its next steps according to the current situation.

“At that moment, the signal is a smaller space to cut interest rates, that is, this process of easing monetary policy will take longer up front; when it happens, it may be even slower than imagined,” he said.

The document also showed Copom’s “special concern” in view of the worsening of inflation expectations. In the text, BC analyzed the possible factors that led to this scenario.

“Such deterioration [de inflação de prazos mais longos] may have occurred for several reasons, highlighting, among these factors, a possible perception of Central Bank leniency with the targets stipulated by the National Monetary Council, an expansionary fiscal policy, which puts pressure on aggregate demand over the horizon of projections, or the possibility of changing the inflation targets now defined”, he wrote.

The last issue came on the radar after Lula publicly criticized the inflation targets set for the coming years —the targets are 3.25% in 2023 and 3% in 2024 and 2025, with tolerance margins of 1.5 percentage points for more or less.

Regarding the possible change in inflation targets, the BC did not go into the merits of the issue and said that “more important than the analysis of the motivations for raising expectations, the committee emphasizes that it will act to ensure that inflation converges to the goals”.

Regarding the BC’s perception of complacency, the monetary authority reaffirmed its commitment to achieving the targets. “[O BC] assesses that, once the discouragement is observed [piora da percepção dos analistas do mercado financeiro]it is necessary to remain even more attentive in the conduct of monetary policy to re-anchor expectations and thus reduce the future cost of disinflation”, he added.

As for the expansionist fiscal policy, the collegiate pondered that the evaluation of demand stimuli should consider the stage of the economic cycle and the degree of idleness in the economy, emphasizing that the interest rate policy is the instrument used to mitigate possible inflationary effects.

The minutes also deepened the discussion on the fiscal issue, with a warning from the BC for the risks surrounding the rule that will replace the spending ceiling. “The review of the fiscal framework reduces the visibility of public accounts for the coming years and introduces premiums on asset prices and impacts inflation expectations.”

The Copom also said that it will continue to monitor the impact of fiscal stimuli on economic activity and inflation.

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