Central Bank independence is linked to the country’s economic health, say economists

Central Bank independence is linked to the country’s economic health, say economists

Two years after the approval of the Central Bank autonomy law, the subject is back in focus, amid repeated criticisms by President Luiz Inácio Lula da Silva of the issue.

Despite the government denying any intention of interfering in the monetary authority’s policy or even in the inflation target, the scenario has been creating uneasiness among economists and financial agents, who fear reflections of the president’s position on the economy.

“When the government, either by rhetoric or practice, contributes to the discouraging of expectations, it scores an own goal and reduces the space for the Selic to fall”, highlights the chief strategist of Warren Renascença, Sergio Goldenstein, in a series of posts (known as “thread”) on Twitter this Friday (3), noting that the rise in inflation expectations of economic agents is reflected in the projections of the Central Bank.

“The effect [de um BC sem autonomia] it is, at least, a higher real interest rate and a lower economic growth than it could be”, adds Alexandre Schwartsman, economist and former director of International Affairs at the Brazilian central bank.

Among the rules provided for in the law sanctioned in 2021, is the definition of a fixed term of office for the president and directors of the institution of four years, with the possibility of reappointment for the same period.

In the view of experts, the BC’s independence is intrinsically linked to the existence of this mandate, as it removes political interference that could divert the BC from its monetary policy objectives.

A scenario of political interference in the trajectory of the Selic is not far away in Brazilian history. BC president between 2011 and 2016, Alexandre Tombini was the target of accusations of having given in to the political will of then-president Dilma Rousseff, at a time when inflation was above the target ceiling.

Tombini assumed BC authority with inflation accumulated in 12 months of 6.5%, and handed over the position with the rate surpassing double digits. His successor, Ilan Goldfjan, arrived at BC with the Selic at 14.25%, the highest level in almost a decade, and handed over his position in 2019 with annualized inflation below 4% and Selic at 6.5% per year.

“When Ilan joined, there was no lack of people asking to raise the inflation target. He held the wave, in part, because the BC’s autonomy was respected. It is a fact that he achieved a very rapid disinflation throughout 2016 and 2017, largely as a result of his stance of not raising the target and holding interest rates”, says Schwartsman.

economic scenario

An autonomous central bank is also directly linked to lower inflation in academic papers.

Estimates made by economists Bernard J. Laurens, Martin Sommer, Marco Arnone and Jean-François Segalotto, in a study published in 2007 on the IMF website, suggest that an independent central bank increases the probability of keeping inflation low by around 50%.

Carlos Honorato, professor of economics at the FIA ​​Business School, explains that the Central Bank has autonomy to make its monetary policy decisions, “which is interest rates, exchange rate policy, selling reserves or not”, he says.

“Lula gives indications that he wants to change the law, and this conveys to everyone the idea that laws are made on a case-by-case basis at the moment. So, from the market point of view, it’s good to have an independent Central Bank, because that way it will take the attitudes of the exchange rate of interest, regardless of who is in government, regardless of the economic situation”, highlights Honorado.

The chief economist at Ryo Asset and former director of the Independent Fiscal Institution (IFI), Gabriel Barros, says that at the moment the country has no fiscal anchor and the attack on the Central Bank’s performance puts at risk the only anchor left, the monetary one. .

“The economic literature and practical experience show the relevance of the Central Bank’s autonomy for controlling inflation, notably the expectations of economic agents. The macro balance is higher with an independent central bank and inflation is lower in countries that have adopted the target regime independently of their central banks. Defending the opposite is equivalent to defending a worse quality macro arrangement”, assesses Barros.

For him, Brazil gains predictability, anchoring expectations, lower structural inflation, indexation and, consequently, lower real balance interest. “If fiscal policy does its homework and is consistent with the performance of monetary policy, the gains are even more profound and lasting”.

Source: CNN Brasil