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Brazil’s ruling party has filed a lawsuit against the head of the country’s central bank as it steps up attacks over the pace of rate cuts and alleged political bias.
Senior figures in President Luiz Inácio Lula da Silva’s Workers’ party on Wednesday filed a lawsuit at a federal court in Brasília requesting that Roberto Campos Neto be banned from making political statements.
The lawsuit came a day after Lula publicly criticised Campos Neto, claiming that he “works much more to harm the country than to help” by not cutting rates more quickly.
“We only have one thing that’s wrong in Brazil right now — it’s the behaviour of the central bank,” Lula said on Tuesday. “We have a bank president who does not demonstrate any capacity for autonomy . . . there is no explanation for the [current] interest rate.”
The legal action marks a sharp escalation of the war of words between the Workers’ party — known commonly as the PT — and the central bank chief, which has raged since Lula returned to office for a third term last year.
Elected on pledges to kick-start Latin America’s largest economy and improve the livelihoods of its poorest citizens, Lula has sought to blame slow progress on Campos Neto — a respected former finance professional.
The central bank has been gradually reducing the benchmark Selic interest rate for almost a year, cutting it from 13.75 per cent to 10.5 per cent. Lula has criticised the pace of the cuts for being too slow.
Lula and his party have also accused Campos Neto of political bias following a series of events that appeared to show that the bank chief had links to leading rightwing politicians.
The lawsuit was prompted by reports that the bank chief had attended a dinner in his honour hosted by Tarcísio de Freitas, the rightwing governor of São Paulo and a possible future presidential candidate. Media reports cited in the legal documents say Campos Neto was offered a job in a potential future De Freitas administration.
Brazil’s central bank was granted formal autonomy from political control by congress in 2021, and Lula is due to appoint a new head when Campos Neto’s term expires at the end of this year.
But the dispute between Lula and Campos Neto threatens to create a credibility crisis for the bank as investors fear there is a political split between monetary committee members appointed by former Brazil president Jair Bolsonaro — including Campos Neto — and those appointed by Lula.
The latter have pushed for bigger rate cuts, according to minutes from the May decision.
Marcelo Fonseca, chief economist at Reag Investimentos, said the spat was “noise that makes it much more costly to manage expectations, harming the efficiency of monetary policy and raising risk premiums on asset prices in general”.
“It is convenient to use the bank chief as the villain and monetary policy as the root cause of the problems rather than recognise that economic policy, and fiscal policy in particular, needs to be fixed,” he added.
The central bank on Wednesday kept the Selic rate steady at 10.5 per cent in a unanimous decision of its monetary committee. The central bank’s inflation target is 3 per cent and inflation is running at just under 4 per cent.
“The government criticises the central bank for keeping interest rates too high, but the question they should be asking is: why is inflation not back to target with interest rates so high?” said Rafaela Vitoria, chief economist at Banco Inter.
“The answer is one the government doesn’t want to face: fiscal expansion is to blame and the [nation’s] new budget framework has so far failed to promote the necessary adjustment.”
Additional reporting by Beatriz Langella
