Brazil’s Lula Taps Two New Central Bank Directors as Rate Cuts Continue

(Bloomberg) -- President Luiz Inacio Lula da Silva will appoint economics professor Paulo Picchetti and career civil servant Rodrigo Teixeira to voting positions at Brazil’s central bank, Finance Minister Fernando Haddad announced Monday.

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The picks will replace two directors who are widely considered the most hawkish members of the board, and will move Lula closer to a majority of votes at the central bank he hammered early in his presidency for maintaining tight monetary policy.

That criticism has softened since August, when policymakers led by Roberto Campos Neto kicked off an easing cycle Lula had demanded. After raising the benchmark Selic to a six-year high of 13.75% to combat post-pandemic price increases, the board has lowered the rate to 12.75% with a pair of half-percentage point cuts.

They are expected to maintain that pace with another cut at this week’s rate decision meeting, as annual inflation continues to show signs of improvement. Lula and Campos Neto have also sought to defuse tensions, pledging to improve communication in a face-to-face meeting in late September.

But investors and analysts have closely monitored the leftist leader’s approach to the board in an effort to assess what its shifting membership will mean for the bank’s tolerance of inflation and newfound autonomy, which was enshrined into law in 2021.

If Picchetti and Teixeira are approved by Brazil’s Senate, Lula nominees will occupy four of the board’s nine seats, after lawmakers in July blessed his first two: former deputy finance minister Gabriel Galipolo and career public servant Ailton Aquino.

Picchetti, who studied alongside Haddad at the University of Sao Paulo, will succeed Fernanda Guardado as the bank’s director of international affairs. Teixeira, a career central bank employee who worked in the Sao Paulo government while Haddad was mayor, will take over for Mauricio Moura as its director of institutional relations.

Analysts broadly see Picchetti, whose selection was initially reported by Brazil’s Folha de S.Paulo newspaper, as a technical pick, while Teixeira was supported by his colleagues at the central bank. Picchetti declined a request for comment on his appointment.

Still, they may shift the board in a dovish direction by default. Guardado, in particular, is seen as one of its most aggressive members, after she voted for a residual interest rate hike that would have taken borrowing costs to 14% last year. She was also among the minority favoring a smaller initial rate cut during this year’s easing cycle.

What Bloomberg Economics Says

Picchetti and Teixeira are technical names with an academic background in economics, but their views on monetary policy are not yet known to markets. Their confirmation hearings will provide some insight on that but, in the meantime, the perception is that the BCB board becomes a notch less hawkish with the departure of Fernanda Guardado and Mauricio Moura.

—Adriana Dupita, Brazil economist

Read More: One of Brazil Central Bank’s Top Hawks Requests Reappointment

Guardado oversaw the bank’s sustainable agenda, which included measuring environmental risks in financial institutions, and led preparatory work ahead of next year’s Group of 20 nations meeting that will take place in Brazil. She had sought reappointment to the board in order to stay on through Brazil’s year as the rotating president of the G-20.

A Shifting Board

Lula, who previously served as president from 2003 to 2010, has argued that policymakers should be more tolerant of inflation in order to bolster economic growth, at times defending a 4.5% goal similar as the one he had during his prior terms.

Ahead of the selections, analysts and investors bet that his growing influence would push the board toward a more relaxed approach to the bank’s current 3% inflation target. For more than three months, estimates of consumer price increases for 2025 and 2026 have remained steady at a half-percentage point above that goal.

Lula is also on track to appoint two more voting directors and a new president of the bank at the end of 2024, when Campos Neto’s term ends.

“There’s a perception that we’ll have a more dovish board” after Campos Neto’s mandate ends, former central banker Tony Volpon said before the picks were announced.

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Galipolo, a close ally of Haddad who is considered a candidate to replace Campos Neto, has publicly reiterated that the bank will bring price pressures back to target.

“There’s not much central bankers can say now” to lower estimates for future inflation, Volpon said, adding that investors will judge them on what they do after they drop rates to levels that are currently priced in. “They won’t win this battle with words, because it’s about who will be the next president of the bank and how it will act,” he said.

Traders bet borrowing costs will fall to around 10.6% during the current easing cycle, while most economists see a 9.25% end-of-cycle Selic rate.

Read More: Brazil Rate Cuts to End Before Forecast, Ex-Central Banker Says

Central bankers have acknowledged that there is a perception the board will turn more lenient toward consumer price increases.

An improvement in future inflation expectations requires “firm conduct” that strengthens the board’s credibility and reputation, they wrote in the minutes of their last rate-setting meeting. Concerns around the government’s goals to eliminate next year’s primary fiscal deficit, which excludes interest payments, are also at play, policymakers said.

Measures of implied inflation are also reflecting those “clear transition risks,” as they stay above the bank’s 3% goal and are unlikely to improve in the short-term, former policymaker Bruno Serra recently told Bloomberg News.

--With assistance from Daniel Carvalho.

(Updates with additional context, analyst reactions from sixth paragraph)

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