ANALYSIS-Argentina standoff sharpens Brazil central bank debate

January 19, 2010

By Ana Nicolaci da Costa

BRASILIA, Jan 19 (Reuters) – A standoff between Argentina’s government and central bank has sharpened debate in neighboring Brazil over the need for Congress to pass a bill making the country’s central bank formally independent.

Brazil’s central bank has no legal autonomy but in practice decides monetary policy broadly without political interference. That has allowed its president Henrique Meirelles to pursue conservative monetary policy and keep inflation within a target range for six years. Such policy has earned him world-wide plaudits for his role in Brazil’s economic stability.

But the bank’s autonomy is still subject to political consent and President Luiz Inacio Lula da Silva’s willingness to support Meirelles.

Brazilian central bank presidents are appointed by the president of Brazil, who also legally nominates central bank directors which then have to be approved by the Senate.

Uncertainty over whether future governments will continue backing central bank officials raises doubts over monetary policy and could add to market volatility ahead of national elections in October, in which Lula is legally barred from standing.

The politically-sensitive bill, under consideration since 2007, is unlikely to pass in 2010 or even next year, said Cristiano Noronha, a political analyst at Arko Advice.

“Today the two main candidates with the biggest chance of winning (the October presidential election) are against such formal independence,” said Noronha, who supports the idea.

“The point is that in formalizing this you are showing that your central bank is autonomous, that your central bank will decide on rates based on technical criteria and that this criteria won’t suffer political interference or at least this political interference is minimized,” he added.

The two main candidates are Lula’s Chief of Staff Dilma Rousseff and Sao Paulo state Gov. Jose Serra, who has been a strong critic of Brazil’s relatively high interest rates.

Many analysts believe Rousseff, while continuing Lula’s largely market-friendly policies, would usher in a more state-centered approach that could raise risks for investors.

Lula has largely given Meirelles free-rein on monetary policy even when members of his own government put pressure on the central bank chief to cut borrowing costs.


Brazil has traditionally had among the world’s highest interest rates, although the benchmark Selic rate is currently at a historic low of 8.75 percent.

The debate in Brazil was thrown into focus this month when Argentine President Cristina Fernandez fired central bank chief Martin Redrado for opposing her reserves plan. A judge reinstated him a day later and blocked the transfer of the funds to the treasury. [ID:nN06209372].

The crisis is unlikely to be repeated in Brazil where economic fundamentals and central bank credibility have solidified in recent years.

The Argentine central bank’s legal independence did not save it from political pressure, but the crisis highlights the importance of having central bank autonomy established in law, analysts say.

“I know the example of Argentina is a crass example, because Argentina from a macroeconomics perspective is far behind Brazil, but what happened there reminds us that it is important to have central bank autonomy,” Zeina Latif, chief Brazil economist at ING in Sao Paulo said.



Despite its relevance, there is little prospect of the law establishing formal Brazilian central bank independence getting through Congress any time soon. Congress is unlikely to push through the controversial bill in an election year and the outlook for the next government is not promising either.

Critics of the legislation say the central bank’s de facto independence has worked well enough in recent years.

The bank has enough autonomy for an institution that is not directly elected and decides on policies with direct impact on Brazilians, they say.

Supporters of the bill say formal central bank independence would prevent the sort of volatility that tends to unsettle markets in election years. Recent talk a central bank director, Mario Mesquita, could be leaving, helped steepen the yield curve on government bonds.

The bill sets out mandates for central bank directors which don’t coincide with that of the country’s president. It also requires the president to seek Senate approval if he or she decides to fire a central bank director.

“Not having legislation delegating formal independence to the central bank does come at a cost,” said Christopher Garman, director for Latin America at the Eurasia Group in Washington.

“Because every time you have turnover of the central bank board or the proximity of presidential elections, it casts a shadow of doubt over how monetary policy will be conducted.”

(Editing by Elzio Barreto, Stuart Grudgings, Andrew Hay)

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