Independence May Remain Elusive for Brazil Central Bank Head

Updated on
  • Push for BCB autonomy may be overshadowed by other measures
  • Goldfajn has won praise for inflation control, communication

Ilan Goldfajn is racking up the milestones as Brazil’s central bank president, but he’s still a long way from securing the institution’s ultimate goal: greater independence.

Since taking the helm in June last year, the 51 year-old former Itau Unibanco chief economist has helped bring inflation to an 18-year low, hastened the end of subsidized state loans, and saw his bank board nominees breeze through their congressional hearings. Such achievements and his more transparent communication have boosted the bank’s credibility, which had been tarnished by its failure to hit its inflation target under Goldfajn’s predecessor.

Yet even with a fair wind at his back and a reform-minded government in office, Goldfajn’s intention to write increased central bank autonomy into law at the moment doesn’t have much support in Congress or President Michel Temer’s administration, according to six legislators, three presidential aides and a senior central bank official. Neither the aides nor the bank official were authorized to speak publicly.

The ruling coalition has bigger fish to fry in trying to pull the country out of its worst recession on record and surviving a barrage of corruption allegations. Most stakeholders also consider the central bank to be functioning quite well and see its de facto autonomy as sufficient. A survey published on Monday showed economists expect inflation to remain below target this year and next. Why use political capital to fix something that isn’t broken, goes the argument.

Yet political interference, or at least pressure, has been a constant in Brazil’s recent past and, with the outcome of next year’s general election uncertain, it could become an issue again. Former President Dilma Rousseff galvanized supporters in her 2014 re-election bid by demonizing the idea of an independent central bank, saying it would benefit rich bankers and exacerbate poverty.

"It’s legislation that should be presented as soon as possible," said Goldman Sachs chief Latin America economist, Alberto Ramos. "It’s not a problem today because there’s no political interference, but it may become one in the future due to the risk of more populist candidates."

Under current law, any of the bank’s nine directors, including its governor, can be fired by the president at any time, making the monetary authority in Latin America’s largest economy something of a laggard among regional peers. Central bank independence has been in place in both Chile and Mexico for over 20 years.

The central bank is still detailing its legislative proposal but most previous bills presented to Congress included some sort of fixed mandate for its directors. The monetary authority declined to comment for this article.

"Write central bank independence into law and Brazil’s credit risk will fall," Goldfajn, who holds a doctorate degree in economics from the Massachusetts Institute of Technology, told Isto E magazine earlier this year.

Government leaders say in principle the coalition supports the idea.

"The question of autonomy forms part of Temer’s reformist spirit," Fabio Ramalho, vice president of the lower house of Congress, said in an interview.

Indeed, the bill may still get an opportunity in Congress before Temer leaves office, according to Eurasia’s Latin America director, Joao Augusto Castro Neves, who said it is far less controversial than other government proposals. Temer has already demonstrated his ability to round up lawmaker support for unpopular economic measures, including legislation to curb public spending and modernize labor laws.

While increased autonomy is desirable, Goldfajn doesn’t need another feather in his cap and the government should focus on its proposal to limit pension outlays, said Newton Rosa, the chief economist at Sul America.

"Ilan is leaving a legacy of microeconomic reforms that have contributed to increased economic productivity," said Rosa, who thinks the question of autonomy may have to wait until after 2018. "The government has several battle fronts. It’s preferable they concentrate their fire on pensions."

— With assistance by Samy Adghirni, Simone Preissler Iglesias, Philip Sanders, Eric Martin, and David Biller

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