Brazil Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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Brazil is ready to take new steps towards greater autonomy for its central bank. This action is part of a broader agenda of economic reform put forward by the new federal government. But it is also the result of a history of institutional development, in which the benefits of an autonomous, transparent and accountable central bank have become clear to society.

Without independence, policymakers may be tempted to provide short-term monetary stimulus at the expense of higher inflation and no growth benefits in the longer term. Indeed, empirical evidence indicates that greater independence is associated with lower levels of inflation and lower inflation volatility – with no sacrifices to long-term economic growth.

The Central Bank of Brazil has acquired de facto operational independence through the successful execution of monetary policy since the end of hyperinflation in 1994. Over the last 25 years, both inflation and policy interest rates have gradually converged to levels which reflect the increased credibility of monetary policy in Brazil. More recently, the National Monetary Council has approved stepwise reductions of the inflation target, from 4.5% in 2018 to 3.5% in 2022, closer to the targets set by peer countries. Inflation expectations rapidly converged to the new targets and policy rates are at historical lows.

Nevertheless, the commitment of policymakers to stable inflation may be challenged by political circumstances. In this sense, the approval of a legal framework to guarantee de jure autonomy to the Brazilian central bank should provide greater confidence that the central bank will be able to meet its goals in the future, both to civil society and to markets. Legal autonomy promotes greater credibility and thus facilitates the task of controlling inflation.

The reform bill under consideration in the National Congress establishes price stability as the fundamental goal of the Brazil's central bank, while financial stability is defined as a complementary objective. Crucially, the bill includes fixed terms for executive directors and for the governor, whose term would overlap only partially with the presidential term. The proposed reform maintains the legitimate powers of the political body to select and appoint directors and governors and to set the more specific goals for monetary policy.

A central bank with greater autonomy demands greater transparency and accountability. This can be fulfilled through a set of instruments, such as the publication of communiqués and minutes of monetary policy meetings, the publication of regular inflation and financial stability reports, and the promotion of public hearings to allow the participation of private agents on policy formulation. As for price stability, the inflation-targeting regime defines a clear and unambiguous goal for monetary policy, and is therefore a valuable instrument for society and political agents to hold the central bank accountable.

A central bank with clear goals and autonomy defined by law will help to consolidate the gains we have made over recent years in terms of price and financial stability. It also complements and supports a broader agenda that promotes a more efficient and democratic financial system in Brazil. It is time to take these steps, as a society, to protect and strengthen an institution that is critical for economic stability and growth.