Goldfajn Can’t Afford to Cut Rates, But His Words Soothe Markets

  • Top economist using new communication plan to influence market
  • Volatility in interest-rate swaps has eased under the strategy

Brazil may have little room to lower interest rates because inflation remains high, but its new central bank chief is finding another way to exert influence on financial markets.

Since taking the helm in June, Ilan Goldfajn has caused volatility in interest-rate swaps to subside and inflation expectations to drop by implementing a new and more transparent communications strategy.

Ilan Goldfajn
Ilan Goldfajn
Photographer: Lula Marques/Bloomberg

He has replaced his predecessor’s terse communiques with statements that run five times as long and provide detailed analysis of economic conditions and inflationary risks. He publishes minutes two days earlier than before, in English as well as Portuguese. And in minutes to the last meeting, the board spelled out the criteria it will use to guide rate decisions going forward, which is something of a novelty for the monetary authority.

“The communication instruments brought by Goldfajn made the central bank’s intentions clearer,” said Andre Perfeito, the chief economist at Sao Paulo-based brokerage Gradual Cctvm. "We aren’t discussing the commas anymore to see if we captured their message."

Greater Confidence

The central bank kept borrowing costs unchanged at 14.25 percent in Goldfajn’s first two meetings. The board in its latest rate communique indicated it can’t ease policy until it has greater confidence it will reach its inflation target, which is almost half the current rate. It reiterated the message six days later in minutes to the meeting.

For a look at the central bank’s latest minutes, click here.

The back-to-back messages reassured analysts and investors that Goldfajn would focus on his mandate of taming inflation rather than giving into political pressures to stimulate growth. Economists surveyed by the central bank have reduced their inflation outlook since Goldfajn took over, anchoring it to the government’s 4.5 percent target from 2018 onward.

And in a sign of the market’s increased confidence in the direction of monetary policy, volatility on interest-rate swaps maturing in January 2017 has hit an all-time low. Long-term futures, such as swaps maturing in 2021, have dropped since Goldfajn entered office, reflecting investor optimism that inflation will cool.

“Central bank communication is important to maximize the power of monetary policy and influences the whole swap futures curve,” said Caio Megale, an economist at Itau Unibanco Holding SA.

Investor Whiplash

Goldfajn’s strategy is a far cry from the whiplash investors felt under his predecessor Alexandre Tombini, who kicked off the first central bank meeting of 2016 with a message that confused the market. He published a statement on the first day of the Jan. 19-20 rate meeting that focused on weak growth forecasts, causing short-term swaps to plunge and some economists to make last-minute changes to their estimates from a hike to a hold. Attempts to reach Tombini this week through the government and International Monetary Fund where he represents Brazil were unsuccessful.

Unlike Tombini, who was a career civil servant, Goldfajn has worked extensively in both the public and private sectors. He left the central bank board in 2003 before joining Brazilian investment firm Gavea Investimentos, and most recently was partner and chief economist at Itau, Latin America’s largest lender by market capitalization.

Goldfajn, 50, studied under the tutelage of renowned economist Rudiger Dornbusch and U.S. Federal Reserve Vice Chairman Stanley Fischer at the Massachusetts Institute of Technology in the 1990s. He shook up the nine-person board by replacing four of its members, adding a former asset management executive as well as an ex-economist from the Federal Reserve Bank of New York.

Not everything can be attributed to Goldfajn’s communication style and working knowledge of financial markets, as part of the drop in long-term swap rates and easing inflation expectations reflect signs the economy is improving. Monthly inflation has slowed from 1.3 percent at the start of the year to 0.4 percent in August, though the annual rate increased last month. Consumer and industrial confidence are rebounding.

Goldfajn says he will keep a close eye on investor confidence as well. He said in an interview this month that policy makers are monitoring investor perception of risk in Brazil as one of the conditions for an interest rate cut, which would be the nation’s first since 2012.

“At some point, the communication will have to be accompanied by action, and that’s where credibility comes from,” according to Itau’s Megale.

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