Can Brazil Say "Central Bank Independence"?

♠ Posted by Emmanuel in at 3/19/2010 12:05:00 AM
While it is common for finance ministers to try and become presidents and prime ministers, it is rarer for central bankers to aspire for these posts. So, we have the interesting case of Brazilian central bank honcho Henrique Meirelles dithering on whether to try and succeed Lula (Meirelles is a former congressman). Instead of splurging on public programmes to win favour, what's a central banker to do? Bloomberg suggests keeping interest rates low may be the thing. Indeed, many pundits were instead looking to Brazil's central bank to raise interest rates to cool rising inflation:
Brazil interest-rate futures sank the most in nine months and the real fell after central bank President Henrique Meirelles held off raising borrowing costs ahead of his decision on whether to run for elected office...

Banco Central do Brasil’s move, which sparked the biggest split vote among board members in 14 months, raises speculation Meirelles is allowing political interests to interfere with monetary policy decisions as he faces an April 2 deadline on whether to run in October elections, said former central bank director Carlos Eduardo Freitas.

“He is a politician, he joined the Brazil’s Democratic Movement Party, he has political ambitions and this creates a parallel agenda,” Freitas, who served two stints as a central bank director over the past 25 years, said in a telephone interview. “It’s hard to be sure there was political influence, but it leaves a certain impression because there were enough elements to justify a raise...”

The decision to hold the benchmark rate at a record low of 8.75 percent was a surprise to 30 of 57 analysts surveyed by Bloomberg who forecast an increase to at least 9 percent to stem inflation as Latin America’s biggest economy recovers. Three of the eight directors voted for a half-percentage point increase to 9.25 percent, the bank said in a statement. That’s the most dissenting votes since January 2009, when three board members voted against a one-point rate cut. Policy makers are slated to next meet to set rates on April 28.
Then again, there are those who believe Meirelles wouldn't jeopardize a hard-won reputation for meeting inflation targets for the sake of electoral gain:
Thomas Trebat, executive director of the Center for Brazilian Studies at Columbia University and a former Citigroup Inc. analyst, said Meirelles wouldn’t jeopardize the credibility he earned over seven years at the bank by making a politically motivated decision now. Meirelles has met the central bank inflation target in all but his first year in office. Arminio Fraga, who implemented the inflation targeting system in 1999, missed the target in two of the four years he headed the bank. “In economic terms, there is reason to almost canonize Meirelles,” Trebat said. “He has obtained that position by being above politics, by making decisions that could always be justified by fundamentals. Would he risk that legacy now?”
It'll be interesting to follow as Meirelles is definitely a bigwig in Brazil with many ties to the United States.