(Bloomberg) -- Early in his term as Brazil’s central bank chief, Roberto Campos Neto racked up awards as he tamed a post-pandemic inflation spike and then started an easing cycle well before advanced economies, all while spearheading the creation of a cutting-edge payment system.
But as he prepares to leave, Campos Neto is under siege. After months of bad blood with President Luiz Inacio Lula da Silva, he was forced to cut short his victory lap and raise interest rates again just as global peers started lowering them. And with some investors questioning whether the monetary stimulus he provided during the pandemic was exaggerated, his woes serve as a warning to central bankers everywhere of how ephemeral success can be.
Brazil will increase borrowing costs for the third straight time Wednesday, the only question being how high. Traders and some Wall Street banks including JPMorgan Chase & Co are wagering on a painful, full percentage point hike to 12.25%. With fiscal concerns mounting under Lula, markets are betting the cycle could take rates above 15% — a result that would more than erase all of the bank’s recent cuts.
Campos Neto’s tenure will ultimately demonstrate that the central bank can’t do its job alone, said Rafaela Vitoria, chief economist at Inter.
“His central bank was tougher, more hawkish and more independent than its predecessor,” she said. “And yet, inflation didn’t converge to the target. We will not have a scenario of controlled inflation if the fiscal situation isn’t also controlled.”
Campos Neto’s successor will have to pick up the pieces from day one. Incoming Governor Gabriel Galipolo will most likely have to write an open letter — as has been done in the past — explaining why inflation surpassed the 4.5% upper limit of the tolerance range at the end of this year.
Annual inflation accelerated to 4.87% in November. On top of that, analysts surveyed by the central bank see no sign that it will ease to the 3% target before 2027.
Different Situation
The current outlook is a far cry from when Campos Neto joined the central bank in 2019. Inflation was under control and, at that time, he believed he would be able to focus on the institution’s innovation agenda, according to two people familiar with his thinking.
Pix was launched a year later. The online payment system revolutionized Brazil’s banking system by extending services to the poor, but it also came amid a drastically changing inflation landscape.
As the pandemic shut down the global economy and gutted consumption in 2020, policymakers led by Campos Neto pushed the envelope by cutting rates to a record low of 2% and also launched banking liquidity and lending lines never seen before.
When prices spiked, Campos Neto reversed course. The bank hiked rates before nearly all global counterparts, including the Federal Reserve. Inflation slowed and forecasts fell in line with the target.
Campos Neto began to declare victory, saying the bank had managed a soft-landing by taming inflation while allowing economic activity to remain strong.
That success proved short-lived as consumption turned surprisingly resilient. The rate cuts that started in 2023 and were expected to be Campos Neto’s victory lap will go down as one of Brazil’s shortest-ever easing cycles.
“Looking back, we can see some errors, with perhaps the Selic being too low before the pandemic,” Vitoria said.
Positive Outcome
Indeed, critics have long said the rate swings on Campos Neto’s watch were too bold, and the decision to start providing forward guidance was too risky given uncertainties. Some former board members now say easing campaigns weren’t cautious enough.
Campos Neto has said that while borrowing costs may have been too low in 2019, they were needed amid forecasts of a global recession. Recent changes in course, he has said, were the best choices he could make with the information available.
There’s also no doubt the central bank’s job of controlling inflation has been complicated by a Lula government that has drastically raised spending. Most recently, investors were dismayed by the government’s decision to unveil income tax relief for poorer workers alongside a long-awaited plan to cut expenditures.
“If there was an error, then it was on the side of fiscal policy and Campos Neto tried to correct the path,” said Marcelo Kfoury, an economics professor and former central bank employee. “The outcome of his management is positive.”
Brazil’s central bank declined to comment for this story.
Political Beliefs
Campos Neto’s behavior outside the central bank left him even more exposed to scrutiny. He was seen voting with a Brazilian soccer jersey used by supporters of right-wing former President Jair Bolsonaro, then attended a celebratory dinner hosted by Sao Paulo Governor Tarcisio Gomes de Freitas, who is seen as Bolsonaro’s political heir.
Angered by those appearances and frustrated by high rates, Lula slammed him as a “traitor” to his country and “an embarrassment” of a central banker throughout his final two years as governor.
Ironically, one of Campos Neto’s triumphs ignited Lula’s ire: the securing of the bank’s formal autonomy. For the first time in his three terms as president, Lula had to work with a governor he didn’t choose.
The tensions initially caught board members by surprise, according to three people familiar with the situation.
“It would have been advisable not to show his political beliefs,” said Henrique Meirelles, who served as central bank governor in Lula’s first presidency. “Still, I don’t doubt his decisions were technical ones.”
There will be no shortage of challenges for Galipolo, who will take over in January. Galipolo has said he is willing to lift borrowing costs, and pledged to have the courage to face complaints from businessmen, politicians and Lula.
“Now reality will test him,” Meirelles said.
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