A Central Banker Winning Kudos

Brazil's Henrique Meirelles talks about interest rates, free trade, and the currency

Investors were surprised, and pleased, when Henrique Meirelles, former head of global banking at FleetBoston Financial Corp., was tapped by Brazil's left-wing President, Luiz Inácio Lula da Silva, to take charge of the Central Bank last January. Meirelles, 58, immediately took strong action to stabilize South America's biggest economy, ratcheting up the benchmark interest rate to halt spiking inflation and bolster a rapidly depreciating real. The move angered local politicians but impressed Wall Street. Meirelles has since gradually lowered rates to 19%, from a high of 26.5%.

Brazil's embrace of sound economic policies has also impressed the International Monetary Fund, which on Nov. 5 granted Brazil a $14 billion loan package. Meirelles describes the IMF credit as "insurance" against volatility in global markets. The following day, Fitch Ratings upgraded Brazil's sovereign rating to four notches below investment grade. On a visit to Miami, Meirelles sat down with BusinessWeek's Ian Katz. Here are some excerpts from their conversation:

Do you believe the Central Bank is sufficiently independent of political influence?

There is no formal independence because the Central Bank is not formally autonomous, but there is a practical independence. There is also a commitment made by President Lula and the Finance Minister to sponsor a project in Congress to give the Central Bank formal autonomy. That will be done early next year. I think it will pass.

But government officials talk openly about the need for lower interest rates. Do you feel a lot of pressure?

We feel the pressure that central banks normally feel in every country. The pressure comes from society, from politicians, from businessmen. When inflation indeed starts to fall, people get very anxious to get interest rates falling.

Are the bank's policies in sync with what the government wants to do?

Yes. We are very much in sync with the economic team. I have a good working relationship with the Finance Minister, with the President, and the chief of staff. I think it's very harmonious. This government acts like a government, not like [when it was] the opposition. Many people are surprised by that.

Next week ministers from 34 nations will meet in Miami to discuss the Free Trade Area of the Americas. The U.S. and Brazil disagree on some key issues. How do you see the FTAA developing?

I hope that an agreement is reached on the FTAA. I think free trade, at the end of the day, benefits everyone. It benefits Brazil, Latin American countries, and the U.S. On the other hand, it's also normal that some countries try to protect some of their weak sectors. If you take the portfolio of Brazilian exports to the U.S., there is a high level of tariffs that are applied. The U.S. protects and gives subsidies to steel, agricultural products, orange juice, and sugar. I think it's normal that we have a tough negotiation. But my expectation is that it will resolved in due time, and eventually you will be able to have much freer Western Hemisphere trade.

Is it your policy to have a relatively weak currency to boost exports?

It is our policy not to give qualitative opinions on foreign exchange rates. But what we can say is that the worries many analysts had during the first half of this year regarding the performance of the trade balance and the current-account balance did not come to fruition. Many analysts were saying in March and April that by September, Brazil would have a trade deficit again and we would have a foreign-exchange crisis because of the big current-account deficit. But the trade surplus in the 12 months to September was the highest by far for Brazil, $23 billion. Our current-account figure from January to September is a positive $3.8 billion, which is the best number since 1994.

How do you see the emerging markets performing in the next year?

Emerging markets nowadays are very diverse. Having said that, I think it will be a positive year. On one hand, the recovery of the American economy and what's happening in Japan will help because it will make imports in those countries go up, and that's a positive. Liquidity also is going to be there. The only point of attention -- it's not concern -- is the possible raising of longer-term rates in the U.S. But in the case of Brazil, the improvement in the fundamentals is so pronounced that it outweighs any rate increase in the international markets. Regardless of what happens with the longer-term American rates, we will see Brazilian rates coming down steadily.

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