beyondbrics

Brazil has the highest real interest rates of any big economy and has taken the offensive in the currency war among the world’s big currencies. Henrique Meirelles, head of the central bank throughout the rule of outgoing president Luiz Inácio Lula da Silva, has taken questions from beyondbrics readers on these and other issues.

We will publish his answers in two exclusive posts today. The first starts here.

The return of inflation?

beyondbrics reader: Brazil’s economic model rests on the tripod of inflation-targeting, fiscal moderation (the primary surplus rule) and a floating exchange rate. This model needs political support, strong enough even to convince a long-time radical like President Lula to embrace orthodoxy. In 2002, this was provided by (1) foreign financiers, who could panic and provoke a huge crisis if they didn’t get continuity, and (2) voters, who liked the new stability, especially low inflation, and were therefore prepared to punish radicalism. From where will political support now come for the orthodox economic policy?

Henrique Meirelles: After a long period of high inflation, Brazilian society is now committed to low inflation. It has become clear that low and stable inflation preserves the purchasing power of consumers and allows for longer-term planning for corporations and households. This environment leads to higher consumption and investment. The resulting higher GDP growth rate has generated the lowest level of unemployment in Brazilian history and a higher average income. In addition, higher tax collection has allowed the government to implement social programs to promote income distribution. There is no doubt that economic orthodoxy played a central role in the recent growth trend experienced by Brazil.

Do politics threaten fundamentals?

beyondbrics reader: Markets seem to be beginning to worry that without your presence at the central bank, Brazil may not be able to manage inflationary pressures in the same effective way as you have done for several years. Will the next government and the central bank (under the leadership of governor-elect Tombini) be able to make monetary policy decisions based on the economic fundamentals and not political considerations?

HM: I do not foresee any reason why the Brazilian central bank would change a successful policy framework. Mr Tombini, the new governor, has been my deputy for five years and is well aware of the whole process.

A threat to credibility?

beyondbrics reader: In leaving, do you feel you will take away with you the inflation management credibility Brazil has arduously won over the last decade?

HM: In recent years, there has been a realization in Brazil that a stable economy is beneficial to the average citizen both directly, generating more jobs and better income, and indirectly, by allowing the government to implement social programs and income distribution. Corporations have enjoyed higher growth, with easier access to credit and to capital markets for the first time. The conclusion is that I do not see why the central bank would change its policies and lose its credibility.

beyondbrics reader: What political aims do you think could be pushed on to the agenda of the central bank that might jeopardise Brazil’s long-term economic health?

HM: I hope none.

Interest rates to stay high?

beyondbrics reader: There is strong inflationary pressure currently in the world and particularly in Brazil, so is it your expectation that Brazil is heading for another decade of 10 per cent-plus interest rates?

HM: Inflationary pressures are currently being seen in those countries that are recovering well from the financial crisis, as is the case of Brazil.

Regarding the level of interest rates, the real rate has been falling steadily in Brazil during recent years and inflation has remained on target. This is due mainly to two reasons: the reduction in the risk premium resulting from consolidated price stability; and the increase in the effectiveness of monetary policy due to the growth in the amount of credit in the economy and the improvement in the profile of public debt.

Changes ahead?

beyondbrics reader: What other tools do you think the next central bank administration would be more inclined to use to control inflation, given that president-elect Dilma Rousseff is said to be committed to reducing interest rates?

HM: Brazil’s experience confirms that conventional monetary policy and stable financial conditions are the key factors for a benign inflation path. The central bank’s board is fully aware of that and President-elect Dilma Rousseff has expressed her support for the central bank policies during the political campaign. There are no reasons to change what is working so well and is bringing tremendous positive changes for the Brazilian economy.

How to cut lending rates?

beyondbrics reader: Regarding the astronomical interests rates charged by all private and government banks in Brazil, from mortgage rates to credit cards rates, could you propose any policy or view on how to get these same rates to a more economic reasonable level?

HM: The central bank has been following an extensive agenda to reduce information asymmetries between banks and their clients and encourage competition amongst financial institutions. Another result of better credit record information is the reduction of delinquency. Measures have been taken to simplify bank fees, credit cards tariffs and the process of transferring current accounts from one bank to another. There have also been measures to improve the ability of financial institutions to exercise their guarantees in the case of a default, decreasing the provision for credit losses, which is another cause of higher spreads. All of that, coupled with a more stable and predictable economic environment, is leading to the gradual convergence of rates to more normal levels.