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Tombini Must Fill Meirelles’ Void to Tackle Brazil Inflation

Alexandre Tombini
Alexandre Tombini, seen here as director of financial system regulation at Banco Central do Brasil. Photographer: Goh Seng Chong/Bloomberg

Dec. 17 (Bloomberg) -- As a doctoral student in economics at the University of Illinois, Alexandre Tombini sent opponents limping off the soccer field with his heavy tackles.

As Brazil’s next central bank president, he’ll need to show similar determination to curb inflation running at its fastest pace in more than five years -- while he’s working for a newly elected president at an institution without formal independence.

The 47-year-old economist, who has spent most of his professional life at the central bank, doesn’t yet have the authority that allowed outgoing bank chief Henrique Meirelles to bring down the pace of price increases to 5.6 percent from 12.5 percent in eight years, said Andressa Tezine, vice president of emerging-market fixed-income at PineBridge Investments, which has about $83 billion under management, including investments in Brazilian government bonds.

“This is a worst-case scenario,” said Tezine, speaking by telephone from London. “You have the current inflation higher than expected, plus you have doubts about the central bank.”

Should Tombini move decisively to fight inflation during his first months in the job, he may establish the sort of credibility that Meirelles currently enjoys, Tezine said. This would cause bonds maturing after 2015 to outperform short-term debt, she added.

Under Meirelles, Brazil’s dollar bonds gained 250 percent from 2003 through Dec. 16, according to JPMorgan’s EMBI+ index. The extra yield investors demand for holding Brazil’s dollar bonds instead of U.S. treasures declined from 1,446 basis points, or 14.46 percentage points, to 175 basis points, or 1.75 percentage points.

Best Performer

The benchmark rate fell to 10.75 percent, from 25 percent in January 2003, the month President Luiz Inacio Lula da Silva took office. The real more than doubled against the dollar, making it the best performer of 16 major currencies tracked by Bloomberg. Brazil’s Bovespa stock index gained 1,142 percent in dollar terms, compared with 41 percent for the Standard & Poor’s 500 Index.

The Brazil of Lula and Meirelles reaped a “double dividend” from economic stabilization and rising commodities prices, said Ilan Goldfajn, chief economist of Itau Unibanco Holding SA and a former central bank board member in charge of economic policy.

As these dividends fade in importance, the Brazil of Tombini and President Dilma Rousseff won’t be able to continue growing at its recent rates without tax and regulatory changes to make Brazil more business-friendly, said Goldfajn, who co-authored working papers with Tombini for the central bank.

By Itself

Tombini’s biggest challenge will be to use his influence to try to change the “policy mix” and bring down the budget deficit to allow interest rates to fall without stoking inflation, Goldfajn said.

“Fiscal policy has been too expansionary. This has left the central bank to fight inflation by itself,” said Goldfajn.

If the government does not reduce borrowing, Brazil’s interest rates could take as long as a decade to converge with international levels instead of four or five years, Goldfajn added in a telephone interview from Sao Paulo.

Rousseff, a former Marxist guerrilla who was jailed and tortured by Brazil’s 1964-1985 military dictatorship, was elected Brazil’s first female president Oct. 31 after she pledged to continue the policies of her mentor Lula and end poverty. Tombini will need to compete to influence Rousseff with Finance Minister Guido Mantega, who will remain in the post he’s held since 2006.

The relationship between Tombini and Rousseff is “a very big uncertainty,” said Marcelo Salomon, chief Brazil economist for Barclays Capital, in a telephone interview from New York. In his confirmation hearing before Brazil’s Senate Dec. 7, Tombini told lawmakers that Rousseff had pledged him “total operational autonomy.”


Brazilian policy makers are appointed and removed by the president and aren’t limited by set terms. By contrast, Federal Reserve Chairman Ben Bernanke, European Central Bank President Jean-Claude Trichet and Bank of England Governor Mervyn King are appointed for fixed terms and remain regardless of who is in power.

Tombini was born in the southern state of Rio Grande do Sul, one of three siblings. His father was an economist for the United Nations in the 1960s and 70s, and the family lived in Paraguay, Guatemala, Costa Rica and Chile during his youth.

Illinois Education

Tombini’s views on inflation were honed at Illinois, in Urbana-Champaign, where he was one of a generation of Latin American economists studying as part of a post-graduate scholarship program set up by economics professor Werner Baer.

The current central bank presidents of Colombia and Paraguay, as well as the President of Ecuador, Rafael Correa, also studied economics at Illinois.

Tombini and Jose Dario Uribe of Colombia took an econometrics class together, and became close friends. The future monetary chiefs of Latin America’s largest and fifth-largest economies used to watch soccer matches together, including the 1990 World Cup tournament, when both Colombia and Brazil were eliminated in the second round.

“I remember when Colombia played Germany, and we equalized in the last minute. He was there celebrating with us,” Uribe said in a telephone interview.

After Tombini met Michele Ann Todd, an American law student whom he later married, the two future central bankers saw each less often, Uribe said. The couple has two children, aged 13 and 9.

Aggressive Soccer

Bernard Mueller, an economics professor at the University of Brasilia, played on Tombini’s soccer team in Illinois. The squad was sponsored by a local restaurant, and played in shirts advertising “Burritos as Big as Your Head,” Mueller recalled.

Mueller remembers his former teammate as quiet and reserved off the field but highly aggressive on it.

“He always played in attack, and used to hog the ball a lot,” Mueller said in an interview in Brasilia. “He took the game very seriously. He would argue all the time.”

At Illinois, Tombini wrote a 1991 doctoral thesis entitled “Financial Instability and Economic Activity in Brazil: Theoretical and Empirical Evidence.” The opening sentence of the 167-page work identifies “high and unstable inflation” as a main cause of financial crises in Latin America.

Raging Inflation

In August 1991, the month Tombini published his thesis, annual inflation was running at 381 percent in Brazil, down from a peak of 6,821 percent in April the previous year. That held back the country’s development by making lenders reluctant to extend credit long enough to finance long-term projects.

Now, Tombini takes charge of Brazil’s monetary policy as inflation approaches the upper limit of the central bank’s target range. Consumer prices as measured by the benchmark IPCA index rose 5.63 percent in the 12-month period through November. Prices rose 0.83 percent from the previous month, the biggest such increase since April 2005.

The bank targets inflation of 4.5 percent, plus or minus two percentage points.

Policy makers on Dec. 3 raised reserve and capital requirements for banks to try to cool the 20 percent annual growth in consumer credit that is powering domestic demand. In his current position as the bank’s Director of Financial System Regulation and Organization, Tombini has a deep understanding of these kinds of measures, which are his “bread and butter,” said Salomon of Barclays Capital.

Currency Appreciation

Low interest rates in the U.S., Japan and the euro region are driving investors to seek higher-yielding assets in emerging markets. This means that countries such as Brazil, Turkey and Poland that face accelerating inflation will need to think “more creatively” about how they conduct monetary policy, to avoid currency appreciation, said Neil Shearing, an emerging markets economist for London-based Capital Economics.

“Tombini’s own background might mean that the Brazilian central bank is more willing to embrace different monetary policy tools,” Shearing said. “He is well versed in all of this. If anyone understood monetary economics better than Meirelles it was him.”

From Meirelles, Tombini inherits an economy slowing from its fastest year of growth since 1985. The world’s eighth-largest economy will expand 4.5 percent in 2011, down from 7.6 percent 2010, according to the latest central bank forecast.

On Dec. 15 Brazil’s Senate voted to approve Tombini’s nomination. Tombini declined requests for an interview before starting his new job when Rousseff takes office Jan. 1.

Brazil’s economic performance over the next few years may hinge on how well he remembers his economics classes in Illinois, said Baer, who also taught the three other Latin American central bank presidents who attended Illinois.

“When they do well, it’s because they got an excellent education,” Baer said. “When they screw up, it’s because they forgot everything we taught them.”

For related information: News on Brazil’s central bank: {TNI CEN BRAZIL <GO>} Top Latin America news: {TOPL <GO>} News on BRIC countries: {STNI BRICS <GO>} Stories on Brazil: {NI BRAZIL <GO>} News on the Brazilian economy: {TNI BRAZIL ECO <GO>} Surveys on Brazil’s Economy: {ECO BZ <GO>} Central Bank Interest Rate Decisions: {CPOM <GO>} Brazil’s Annual Consumer Prices: {BZPIIPCY <Index> GP <GO>}

To contact the reporter on this story: Matthew Bristow in Brasilia at; Iuri Dantas in Brasilia at

To contact the editor responsible for this story: Joshua Goodman at

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