Lula, Brazil’s Senate Step Up Pressure for Rate Cut Signal

(Bloomberg) — Brazil’s central bank is discussing its next monetary policy move amid growing pressure for interest rate cuts from President Luiz Inacio Lula da Silva’s administration and even senators who are the ultimate guarantors of the institution’s autonomy.

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Concern that the bank led by Roberto Campos Neto may keep the door closed to a rate cut in August — after likely holding it at 13.75% on Wednesday, as widely expected — has been growing among members of Lula’s economic team in recent weeks, according to two government officials with knowledge of the discussions.

Fueling such concerns are recent remarks from members of the bank’s board, including an interview from Financial System Director Renato Dias Gomes, who told a local newspaper last week that a hasty easing of monetary policy would end up being costlier in the long run, potentially derailing efforts to fight inflation. His interview to O Estado de S.Paulo newspaper was seen by Finance Minister Fernando Haddad as a message from Campos Neto, said the officials, who requested anonymity to talk about internal matters.

Gomes, however, is seen as one of the most hawkish central bank board members, who sided with International Affairs Director Fernanda Guardado last year and voted for a final rate increase that would have taken the benchmark Selic to 14%.

An ongoing discussion about the appropriate level of interest rates needed to keep the economy from slowing or overheating has also raised a yellow flag at the finance ministry, the officials said. If the so-called neutral rate is going up in Brazil as the central bank’s board has debated in its past three meetings, then higher borrowing costs would likely be needed for longer to bring inflation down.

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The central bank declined to comment. In recent public appearances, Campos Neto has signaled he’s open to start discussing rate cuts and stressed that the institution’s decisions are made by its board, where he has only his own vote.

Brazil’s monetary authority is widely expected to keep borrowing costs unchanged for a seventh straight meeting on June 21, when most economists anticipate that policymakers will open the door to a monetary easing cycle starting as early as August. Annual inflation has slowed to less than 4% in May, within the tolerance range of this year’s 3.25% target.

Worried Senators

Calls for lower interest rates made by Lula since the beginning of the year have quickly spread among business leaders and now senators, who are in general very attuned to the needs of the productive sector. Some of them, the officials said, have told members of the economic team that Campos Neto could be stripped of his mandate if the bank fails to deliver a rate cut or at least a clear sign of an imminent easing cycle on Wednesday.

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Others, including Senator Humberto Costa from Lula’s Workers’ Party, were more careful.

“There’s growing dissatisfaction among senators, who expect interest rates to start falling,” Costa said in an interview. Asked whether senators could approve a possible motion to cut short Campos Neto’s mandate, he answered: “There’s a movement in the senate, but right now it is to pressure for a rate cut. If that doesn’t happen soon, that movement may grow.”

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While the central bank autonomy law approved in 2021 gives the senate the prerogative of removing board members whose performance is considered “insufficient to meet the goals” of the institution, such a drastic move would have no support from the majority of the upper house, not even among all the members of the Workers’ Party, according to three separate people familiar with the thinking of lawmakers.

The senators worry in particular that removing Campos Neto, whose mandate expires in 2024, would weaken the autonomy law they approved just two years ago, with likely negative repercussion among investors, they said. Furthermore, Senate chief Rodrigo Pacheco has already said he sees no reason to support such a move, which means he’s unlikely to bring it to a floor vote.

Yet Lula has indicated that it’s up to the senate now to decide on Campos Neto’s future.

“The central bank president needs to explain why he doesn’t lower interest rates, not to me as I already know the reason, but to the Brazilian people and the senate.”

–With assistance from Maria Eloisa Capurro.

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