Lula and the Central Bank

Blanca Alaníz, Quadrados series, digital photography and photomontage based on the work Planos em Superficie Modulada by Lygia Clark (1957), Brasilia, 2016.


President Lula's strategy regarding the Central Bank and monetary policy

In this text, I seek to reflect on the political pertinence of President Lula's strategy, at the beginning of his third term, in relation to the Central Bank and monetary policy. I show, at the outset, the unprecedented challenges that Lula has overcome in the last five years, including those that emerged in the most recent period between his victory in October and the infamous January 8, 2023. I contrast this series of successes with the dissonant performance in the economic area, listing the reasons that justify this critical evaluation.

I emphasize, as the main point of the text's argument, that Lula, and the PT itself, run the risk of contributing to the failure of a path, modest, but realistic and available, capable of taking the economy from its current slowdown to a recovery, without demonstrating having an alternative plan. Before outlining, in the last part of this article, in general terms, this path, which emerges from indications both from the economic team led by Fernando Haddad and from the evaluation of most analysts of the political-economic scenario, domestic and global, I seek show that, from a substantive point of view, Lula's criticisms of the monetary authority, his model of autonomy and the very prominent role of the financial market in the economic policy debate must be the object of unfolding, as there is much to reflect on all these themes . The recognition of this does not contradict, however, the text's defense that Lula is not the appropriate agent to lead this debate.

The challenges overcome by Lula

There is probably no comparison from a historical point of view. At least in Brazil, no politician, presidential candidate, incumbent or effective president has gone through the series of difficulties that Lula faced and overcame. Arrested in 2018, demoralized and stigmatized, his political death was decreed, which did not prevent him from resurfacing in 2022 as the only name capable of defending the threatened democracy. Candidate, he faced the most unbalanced campaign since the 1988 redemocratization, and, even so, he was elected president for the third time.

Already elected, but before taking office, given the abandonment of office by Jair Bolsonaro, he had to govern without a pen and negotiate the approval of a PEC (the “Transition”) without which the legacy of disorder and chaos bequeathed by the previous misgovernment it would prevent not only the fulfillment of central promises of the campaign – such as the Bolsa Família of 600 reais –, but also the minimum functioning of the public machine at the beginning of the future term, making the new presidency unfeasible at the start.

Acting President, with only eight days in office, suffered, on the infamous Sunday of January 8, an attempted coup d'état, which he was not only able to overcome – uniting in resistance all the other Powers, the Federation and the largest part of civil society – but it did so in order to also avoid traps that were embedded, like sinister Russian dolls, in that terror enterprise.

Immediately, the trap that would lead to the tutelage of the Armed Forces, which would have been the result of the GLO operation that it had the wisdom to reject, still in the midst of vandalism and barbarism in Brasília, and, subsequently, the forced coexistence with a Army commander who, determined to protect those who practiced violence and shield the obvious participation of the military on January 8, would block any attempt, even modest, to “debolsonarize” the corporation. Dismissing him was a clear sign that civil-military relations would have to adapt to the verdict at the polls.

The first days of government also confronted the new president with the advanced threat of extermination of the Yanomami, forcing the outbreak of a war operation on the northern border against the criminal and genocidal mining industry sponsored by Jair Bolsonaro. Added to all of this was enough agility to undertake international trips and strategic contacts with various world leaders, which not only reintroduced Brazil to the international scene, but served as a strategic reinforcement to the ongoing task of saving democracy, in addition to aligning the country on the side sure of the fight for environmental preservation and against the worst consequences of the planetary climate collapse.

It is impossible to minimize, therefore, the size of the immediate challenges and the number of successes of the new government, and of Lula personally, when facing them, from the election to the first weeks in power.

And this is where an – important – note of dissonance comes in. In the economy, after more than two and a half months of government, the story looks different.

The discordant note in economics

Even having available the prospect of a path, modest but real, to transition from the ongoing slowdown of the economy to the desired recovery, the government presents itself, in this matter, divided, vacillating and without a firm north. The Ministry of Finance, which is responsible for formulating policies and carrying out measures in this area, has an action plan (although it has not yet been made public), but it risks losing its political capital, and weakening itself, even before important battles in this area were initiated, precisely because of the lack of internal support.

Added to this is the fact that the leadership of the PT, the main party in the governing coalition, does not see any contradiction in attacking Minister Fernando Haddad, as was seen in the dispute over the re-encumbrance of fuels, as if this did not affect the willingness of the rest of the (still uncertain) allied base to sustain the economic measures to come, much more complex and difficult to negotiate, and on which the government's success in generating income and employment for the Brazilian population depends.

What causes greater concern, in the economic area, is that Lula himself has involuntarily placed himself, at the beginning of his term, in a destabilizing position for his government.

Opening a “war” against the autonomous Central Bank and its monetary policy, the president, in addition to moving away from the natural role of “arbiter” that the position suggests, engenders consequences in the economy that are the exact opposite of what he intends. From December to now, and in particular with the escalation of presidential statements, from mid-January, inflation expectations have not ceased to increase, the exchange rate has deteriorated and the yield curve (rates for different maturities in the future) has steepened, signaling more expensive financing for private credit and public debt, worsening the government's fiscal outlook and the investment horizon, which is vital for growth.

As a result, the space for the Central Bank (BC) to initiate the long-awaited reduction in interest rates has been reduced, in the opinion of many analysts. The start of the COPOM rate cut, forecast by the market, last November, for March, is now seen as likely only at the end of the year or even at the beginning of 2024.

It is true that the growing indications that the economy has been weakening, added to the fear of a credit crisis, in the wake of the case of the Americanas, pressure towards the relaxation of monetary policy in a shorter term. And that there are important economists, such as André Lara Resende, one of the inventors of the Real Plan, who disagree that the Central Bank is completely “guided” by the market and its expectations, including regarding the term structure of interest rates, suggesting that the monetary authority has greater maneuver in relation to the market and that it should use it.

So far, however, what we have is an increase in pessimism, among analysts consulted by the Central Bank, about the possibilities of cutting the basic interest rate still in 2023. If, in early February, 25% bet that interest would not fall until the end of the year, a month later this proportion reached 36% among the experts consulted, as reported by the newspaper Economic value (7.03.2023), and it is virtually unanimous among observers of these movements that the presidential statements critical of the Central Bank and the level of inflation targets are one of the factors responsible for this deterioration in expectations.

It is possible, therefore, that the Planalto's strategy to accelerate economic growth is not well calibrated.

Lula may even be wanting to inform the population that he is not responsible for the scorching interest rates and foreseeable future difficulties in the economy, transferring the blame to the direction of the Central Bank, appointed by Jair Bolsonaro. Understandable. Above all, because it is the first experience in which a president takes office having to deal with an autonomous Central Bank with a mandate. However, by aggressively voicing his criticisms, demanding immediate solutions, and without greater caution, he risks shooting himself in the foot and the prospects for growth that he so badly needs.

And without need, as there would be many other agents that could play this same critical role, without causing the turbulence, and the negative reaction in key prices for the economy, that a presidential speech of this nature tends to provoke.

But, before investigating the course available for the new government's economic policy at the beginning of his term, let's see what Lula is right about in this controversy with the Central Bank. It's no small thing.

Yes, there is much to be discussed.

To begin with, Brazil does have the highest real interest rate in the world, currently hovering around 8%, after discounting expected inflation (rate ex-ante). This situation, although with variations over time, has been a central feature of the Brazilian economy since monetary stabilization in the mid-1990s.

There are many difficulties that expensive credit brings to the country, among which stand out the chronic unsatisfactory level of growth and job creation, the overvalued exchange rate, which hinders exports, and the fiscal imbalance that it produces in public accounts, placing jeopardize the sustainability of the public debt over time. Strictly speaking, since the Real, we have traded, to a certain extent, a pace of growth for inflationary stabilization. We no longer remember that we grew at “Chinese” rates between 1930 and 1980.

Lula is right to insist that this scenario not be naturalized and to encourage discussion on the subject. It is a crucial point on the public agenda to understand the reasons for this anomaly – as countries with much more severe conflicts than Brazil, a more precarious fiscal situation, a higher debt stock and more modest resource potential coexist with lower real interest rates. It is vital to chart a path to gradually overcome the problem. It is a matter, however, that requires reflection, caution, technical expertise and timely and well-calculated political decisions. And that does not combine or bend to bravado and rhetoric.

The model of autonomy of the Central Bank (BC) is also far from being averse to criticism. Designed the way it is, it may distance itself from the economic policy guidelines of the current government – ​​which can be positive or harmful, depending on the circumstances, diagnoses and corresponding guidelines put into practice by the Treasury and by the monetary authority in the face of these circumstances. What is certain, however, is that, shaped in the current mold, the model runs a considerable risk of approaching excessively, and sometimes exclusively, the dictates of the financial market.

It is from there that, over the last three decades, presidents and main directors of the Central Bank have tended to be recruited, as demonstrated by recent research coordinated by political scientists Adriano Codato and Mateus de Albuquerque. Naturally, those formulators of monetary policy, drawn from large banks and asset managers, bring a specific culture, a way of seeing the world aligned with the privatizing values ​​of the market and, additionally, they usually, at the end of their mandates, return to their their posts in the private sector, in the perverse phenomenon, not alien to other regulatory areas, of the “revolving door”, which, obviously, conditions their behavior as public agents.

There's no reason to think it has to be that way. There are several measures that could greatly improve the weaknesses of this model, making monetary policy management more open and balanced, calibrating more diverse influences and making it more difficult for conflicts of interest to emerge. Point, therefore, again, for those who want to discuss the issue.

Thirdly, the assumption of a single “optimal” level of inflation, which informs the target models pursued by Central Banks, can be questioned insofar as monetary policy decisions generate redistribution effects, not being “neutral”, in its implications for the various segments of society, nor, therefore, fearlessly “techniques”. There are winners and losers, depending on the policies adopted, contrary to what conventional doctrine says, not by chance increasingly challenged in central countries at least since the great crisis of 2008.

Just think of the different “disinflation cost” possibilities, in terms of the projected size of a downturn/recession, or the implications embedded in timeframe stipulations for a return to target price levels that have fallen outside permissible ranges. In both cases, the monetary authorities are probably faced with different ranges of alternatives, which, in the end, could mean the survival or liquidation of tens of thousands of companies and millions of jobs in an economy of the size from the Brazilian. It can also mean, admittedly, a return to monetary stability in a timely manner or the entry into an inflationary spiral, with the harmful consequences that Brazilians who were already adults in the first half of the 1990s are aware of.

Another point is that the very mission assigned, by the Brazilian Central Bank autonomy law, emphasizes the maintenance of inflation within stipulated variation intervals, to be achieved within a given period, putting in the background, contrary to the norms in force in other countries, objectives related to economic growth and employment. The US Fed's mission, distinctly, equates both purposes in importance. There is room, therefore, to redesign missions in this area, better balancing the objectives.

But there is yet another aspect to this matter which is crucial to mention. It is not specifically related to the Central Bank and its mode of operation, but involves the question of how Brazilian society, through the mainstream media, was encouraged to see the financial market itself – basically, as a set of specialists capable of printing stamps of quality to public policies.

For at least twenty years, the main Brazilian economic commentators – those who work in the main media vehicles – have aligned themselves in such a way with the vision of the economy of analysts and operators of the financial market that the latter has come to be seen, in practice, as as the authorized instance of definitive judgment of the quality of the economic policy executed by the governments.

Everything has happened, and has been reproduced this way for decades, as if we were not facing a sector of the economy that acts to maximize its own profitability, dependent on the fiscal solvency of the State, with an accentuated short-term bias – which, it should be said, , is within the rules of a capitalist economy. What is unusual, however, is taking the view of this segment, which naturally reflects its interests as a creditor of the public debt, as the judgment framework capable of irrevocably legitimizing or delegitimizing any economic policy proposals, whether they come from governments , the university or other experts.

By doing so, debate and discussion are renounced as a general rule of public interaction in addressing subjects that interest everyone, handing over the task of defining what is pertinent or not, in terms of economic policy, to one of the interested parts. It is no exaggeration to say that this is a complete nonsense and that we have paved the way for the public agenda to be defined by the interests of only one sector – a very powerful one, by the way – of society. Point again for those who advocate putting their finger on the wound.

I close this topic with a more specific observation. The behavior of those who preside over the monetary authority, responsible for the execution of a State function, holder of a mandate and disconnected from the current governments, needs to be coherent. And it's part of the game to charge this posture. Roberto Campos Neto made a clear mistake, moving away from the role that is legally attributed to him, by expressing party preference, going to vote wearing the Brazilian national team shirt in both presidential rounds.

And he made a mistake again by participating in the WhatsApp group of ministers in the government of Jair Bolsonaro. On the other hand, it should be recognized that, during its management, the BC raised interest rates from 2 to more than 13 percent, between 2021 and 2022, therefore, in the period in which the former president who appointed him ran for election re-election. There is also something to discuss here.

There is, therefore, vast matter for debate in society. Lula is right to demand the discussion. It fails only when it takes on the front line of this task and gives the impression of demanding immediate responses. And this mistake is more worrying because it collides with the path, modest but real, of resuming the growth available to the new government.

Which route?

The route that seems to be available requires coordinated action between the economic area of ​​the new government, led by the Ministry of Finance, and the Central Bank, since it requires harmony between fiscal and monetary policies. The task gains in complexity, since Fernando Haddad is the first head of the economic team that has to cohabit with an autonomous Central Bank, appointed by the previous government. He quickly understood the implications of this new scenario and has sought to maintain a permanent channel with Roberto Campos Neto, who has a mandate until 2024 at the head of the Central Bank. This relationship will not be simple and will involve moments of convergence and others of tension. The secret will be to avoid excessive fraying that signals a breakdown in communication. Divergences and different visions are in the account, burning the caravels of a minimum coordination, no.

In a scenario in which the Brazilian economy slows down, having overcome the effects of the short-term electoral incentives that Jair Bolsonaro and Paulo Guedes appealed for in the ultimately failed quest for re-election, but still maintain inflation levels far from the target, and in which the global context engenders contradictory signs – without knowing whether China’s return to economic normality will compensate for the current brake pull on the pace of the economies of the United States and the European Union –, the path available, it is important to underline, beckons with modest results in 2023 , opening up the possibility of more substantive growth only for 2024.

The steps that would structure this path include fiscal measures, of different degrees of technical and political complexity, on the part of the government that, if well formulated and forwarded, can positively affect market expectations, regarding inflation and the debt trajectory, and increase the medium-term growth potential of the Brazilian economy. This realization of an economic program by the new government, alongside the deepening of the perception of the ongoing slowdown, would pave the way for the beginning of the loosening of the monetary policy, which would stimulate, in a synergy effect, investment productive and facilitate public debt management, resulting in a strengthening of the government's fiscal position.

If we add to this concerted handling of the fiscal and monetary dimensions an external scenario that is at least "neutral", and some beginning of foreign investment contribution - the result of the country's return to the international scenario and of eventual opportunities generated by decarbonization, energy transition, alignment of the environmental policy, and restructuring, with a regional bias, of global production chains – we can imagine a slow but effective journey of resuming growth on solid bases, the signs of which would be visible in mid-2024.

Politically, it is true, we have a delicate combination: if everything goes more or less well, results, still modest, will emerge in a horizon of about eighteen months; the tasks that can lead us to this, however, are immediate and all are “hardships” from the political point of view, that is, they involve conflicts, in multiple dimensions, involving (and even affecting, in terms of costs) powerful actors .

It is not the case, within the scope of this text, to deepen the point, but the mere enunciation of the projects that will have to be submitted by the government to Congress so that, after challenging negotiations, they can be implemented, speaks for itself, highlighting the new fiscal framework – which replaces the demoralized spending ceiling created in 2016 in the Temer government – ​​and the tax reform, which will have a stage of unifying indirect taxes and another that will focus on taxation on income and wealth.

There is no need to waste ink to point out that these two matters affect not only the so-called “upstairs”, but the entire federative structure (Union, States and Municipalities), mobilizing the main political forces in the country. They demand competent communication, since, affecting the pockets of the population, and the elites, they will be a full plate for an opposition that dominates the disinformation ecosystem like no one else. And they will have to be voted on, it is worth remembering, by two legislative houses where the government, as announced in the first week of March by the re-elected mayor with more than 400 votes, deputy Arthur Lira (PP-AL), did not even consolidate a majority to vote “simple matters”, being very far from having a consistent base to venture victories in matters that require qualified majorities or even constitutional quorums.

Political “quarries” are not impregnable, but they require, at a minimum, political leadership with a clear vision of purpose and a disciplined coalition to sustain agreed objectives. Lula's strategy of attacking the Central Bank and demanding an immediate change in monetary policy, although it may work as a way of transferring responsibilities, indicates a dangerous alienation of the country's main leadership, and of the new government, in relation to the feasible path to resume the growth.

The open conflict between the PT president, Gleisi Hoffmann, and the finance minister, Fernando Haddad, in the case of fuel exemption, a trivial topic when compared to what will have to be discussed in a few weeks, suggests a lack of solidarity and cohesion in the main governing coalition party.

There is no chance that the prerequisites for the route outlined by the Treasury will be met without the leadership of the President of the Republic and the commitment of the main coalition party. If the PT does not assume political costs, it will not be Arthur Lira or the “Centrão” who will do it in its place. On the contrary, a weakened government, which wastes the path, narrow but real, for the organization of an economic recovery, will restore the dream land for the inventors of the secret budget to perfect their predatory vocation of the treasury and government structures, to not to mention the danger, which will increase, of a victory in 2026 by some leadership associated with the extreme right.

With no alternative to deal with the economic challenges, wasted the course available today, it will run the risk of acting on a counterproductive pendulum: going from the most accentuated voluntarism, in an attempt to force the economy to walk in forced march, which, after failing, will not leave the government no alternative but to surrender, without conditions, to the dictates of the financial market.

*Sergio Eduardo Ferraz holds a doctorate in political science from USP.

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