After Rate Cut, Brazil Questions Central Bank Motive: World View

Alexandre Tombini makes an unlikely media star. The portly, bespectacled, 47-year-old head of Brazil's central bank speaks quietly, and chooses his words with care. So when the bank decided to cut its benchmark interest rate by half a percentage point on Aug. 31 -- to 12 percent, after raising it to 12.5 percent the previous month -- it threw analysts and the market off guard, and left many Brazilians questioning the bank's motives.

Tombini has been getting grilled by the Brazilian media ever since.

Even two weeks after the cut, a television interview with Tombini makes prime-time news. This is how worried Brazilians are about the inflation rate, which is officially at 7.23 percent but feels much higher in major cities like Sao Paulo, where food prices are rising quickly. Brazilians remember the bad old days of economic chaos as the economy lurched from one disaster to the next -- in 1989, accumulated inflation hit a staggering 1,782 percent.

To introduce its interview with Tombini on Sept. 8, the "Jornal da Globo" television news program first broke the bank's decision down into three bullet points:

-- "Serious and long world crisis"

-- "Strong fiscal adjustments"

-- "Disregarded signs of inflation"

The first two, Tombini explained, were the most important, and suggested slower inflation -- which is the bank's main target. Because global growth is sluggish, and because Brazil has made some strong budgetary reforms, he argued that a reduced rate was justified.

But both the market and the Brazilian media saw the hand of the federal government in the rate cut. Though the central bank is officially independent, it's no secret that Brazilian President Dilma Rousseff wants to see slower inflation.

Tombini did his best to bat this away on "Jornal da Globo." He said:

The central bank continues operating with operational autonomy. In other words, our policies are based on our examination of Brazil's economic situation, the external conditions of the international economy and the perspectives for inflation. Based on this diagnostic made here at the central bank, we made our decisions.

Enter Dilma -- as the president is universally known -- with an interview shown Sept. 11 on Brazil's biggest television show, "Fantastico." To warm up, the president escorted presenter Patricia Poeta around her official residence, the Palacio da Alvorada, and talked food, soap operas and grandchildren. ("Fantastico" mixes everything from home-video bloopers to dramatic human stories to celebrity interviews.)

But after the fluffier questions, the interview moved to government corruption -- and the rate cut.

"Was there interference from the president in the central bank's decision to reduce the basic interest rate by 0.5 percent?" Poeta asked. Using the formal "A Senhora" form of address, Poeta continued: "You didn't interfere, not even lightly, in this case?"

Dilma responded:

No, we didn't do this. We were taking this opportunity to say that the world crisis, when it deepened in August, created a new international conjuncture. And it is this international conjuncture that creates the difference and not us interfering in the central bank.

On Sept. 12 Tombini was back in action, this time in a full-page interview in Valor, Brazil's leading business daily. "Central Bank wanted to avoid 'overdose' in de-acceleration," read the paper's headline. "Tombini justifies unexpected cut with worsened situation abroad and denies political pressure," it added.

In the interview Tombini defended the bank once more:

We are not betting on catastrophe. We are betting on a de-acceleration in international growth and a more prolonged crisis than in 2008. It's enough to look at the governments around the world. Almost everyone has got negative rates or real rates that are very small. In Brazil, the rates are 12% for an inflation that is at a peak of 7.23%. You do what you can.

But despite this coordinated media campaign, the market remains unconvinced, as columnist Erica Fraga noted in the Folha de Sao Paulo newspaper Sept. 13:

The monetary authorities try to get across the message that they took the right decision in reducing interest rates two weeks ago. They bet on a fall in inflation in the wake of the declaration that turns with the crisis and cools the economy. But the skepticism of the market in relation to this diagnosis continues to grow … The projections are for bigger inflation and new cuts in interest rates, in the context of income gains that are sufficient -- even if they are less -- to maintain the demand for goods and services.

Miriam Leitao, a columnist for the O Globo newspaper, also questioned the bank’s conclusions in a blog post:

The problem is that the speed of world economic growth is falling, but food prices continue to be high because of various factors, like climatic problems in countries which produce important crops. The Central Bank is right when it says that the international economy is worse than it was at the beginning of the year and that there are many uncertainties. But will this defeat world inflation?

She added: “The scenario the Central Bank sees is more pessimistic than that predicted by other market analysts.”

The bigger picture informing this debate is the world economic slowdown and its potential impact on Brazil. The government is still proud of the way it rode out the financial storms of 2008. And it's determined to pull off the same trick again.

(Dom Phillips is the Sao Paulo correspondent for World View. The opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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