Interview: Brazilian Central Banker Henrique de Campos Meirelles

Henrique de Campos Meirelles
Henrique de Campos Meirelles, president of Brazil's Central Bank (Photo: Evaristo Sa/AFP-Getty Images).

Brazil’s most recent agreement with the IMF was the country’s last, the president of the Central Bank believes. He is now forecasting growth and lower interest rates. [The deal upgraded Brazil’s credit rating, gave the country another $14 billion in loans, and reduced its 2005 loan payment by nearly 50 percent—WPR].

The president of Brazil’s Central Bank, Henrique de Campos Meirelles, shows no sign of being unsettled by criticism. He even betrays a hint of vanity when he demonstrates that he is analyzing the Brazilian economy’s behavior with the same sang froid he brought to FleetBoston Financial’s balance sheets when he was its president. “I am focused on results,” he maintains. In his private-sector career, he became accustomed to answering to a board of shareholders. Now he is being called to account by politicians and the public. Entrepreneurs, members of Congress, government officials, and even Vice President José Alencar are joining the chorus of those calling for a significant interest rate cut. But Meirelles is forging ahead, undaunted: “Anybody who wants to be popular cannot be in the Central Bank,” he says. He argues that a monetary authority looking for popularity “would cause serious problems for the country.”

Meirelles is convinced that he has done a good job. He denies that the Central Bank is responsible for the months of recession that Brazilians suffered in 2003. For him, high interest rates “are not only necessary, but indispensable.” An optimist, he foresees a resumption of growth and asserts there is room for a new decline in interest rates. “Real” interest rates, those paid by people who buy on credit, borrow, or use overdraft-protection agreements (so-called cheques especiais), are still far above those arbitrated by the COPOM (Central Bank Monetary Policy Committee). “The Central Bank’s interest spread is still very high,” he admits. To alter that picture, he is betting on alternative measures, such as loans made through workers’ payroll deductions.

There is no turning back. Meirelles believes the economy’s major ills were the result of heterodox policies, and he does not plan on abandoning the classic prescriptions he has employed to date. And that is why he is predicting that the agreement reached last week with the IMF will be the last.

ÉPOCA: The Swiss bank UBS has asserted that when Brazil signed the agreement with the International Monetary Fund, it lost a good opportunity to declare economic independence. How do you evaluate that critique?
Henrique Meirelles:There is a saying in Minas Gerais [a state north of Rio de Janeiro]: “Caution and chicken soup never did anyone any harm.” The agreement is extremely positive for the country. It endorses the Brazilian government’s economic plan and does not bring with it new demands for us. The agreement also serves as insurance against possible external crises. It is free insurance, to the extent that there are no new demands beyond those already proposed by the Brazilian government. The agreement also facilitates payment on the debt owed the IMF in a gentler fashion. This makes us more confident that this will be the last agreement with the IMF.

Your assertion about the agreement’s terms...could it not be understood in another way: that the IMF made no new demands because the Brazilian government’s policies are already in line with its set of recommendations?
It could, but that would be a mistaken reading. The Brazilian government’s decisions are, first and foremost, the ones that are best for the country. They are technically correct and are working. We are following the most successful economic policy in the world. It has three aims: The first is price stabilization. As we know, there isn’t a nation that has consistently grown with high inflation. The second objective is to balance our public accounts. The third objective is to make fundamental reforms that would make sure the public accounts stay balanced. Moreover, there are bills to modernize the economy, bills aiming, for example, to reduce bank interest spreads [the difference between the interest rate a bank pays on deposits and the rate it charges borrowers], and the new bankruptcy bill [which seeks to speed up bankruptcy proceedings and lower borrowing costs].

So the Lula administration’s budget follows the IMF’s classic recommendations?
Brazil’s development plan is endorsed not only by the IMF but now also by rating agencies, the market, economic actors, and the public, as witnessed by its support for Lula.

Did Brazil really need to clinch this new deal?
The agreement is not necessary but convenient. It was not indispensable. If it did not exist, we would not have any major problems. It is a positive agreement because it adds a series of factors capable of making it easier for the country to get back on the road to growth.

Historically, the Brazilian Workers’ Party (PT) has been inimical to the IMF. Have you been encountering greater resistance now?
We had a difficult time explaining the agreement, since all previous agreements with the IMF had been reached in times of crisis. They required changes of plans on the government’s part. This was the first agreement reached without an economic crisis, so it had to be explained not only in Brazil but also in the IMF. In the IMF, there were doubts of the sort: Why negotiate an agreement if Brazil has weathered the crisis? At home and in the IMF, the explanation was that the agreement would make a more rapid resumption of the country’s economic growth viable.

When you assumed the presidency of the Central Bank, there were doubts about how a banker would coexist with a left-wing government. Following 10 months of coexistence, how do you evaluate that living arrangement?
I can say that it may be the best living arrangement in my professional career. Mine is a serious team, comprised of people with common sense and financial training. It must be said that in my professional career, aside from having worked in the financial markets, I have played a role in the social arena. We implemented projects with former São Paulo mayor Luiza Erundina [mayor from 1989-1992] and with the current Social Security minister, Ricardo Berzoni. The PT and I already had had a meeting of minds.

Former Economy Minister Delfim Netto is always saying that the directors of the Central Bank have a single train of thought, in line with the financial markets’. According to him, the lack of contrarians at the Central Bank ends up ruining decisions because there are no disagreements. What do you think of that?
I like listening to the congressman a lot, and I respect his opinions. Bank policy dictates that disagreements within the directorship of the COPOM  are not aired in public. That situation may give the impression that there is a uniformity of thought. That is not true. Of course there is a level of technical and economic training among the bank’s several members that facilitates that convergence of ideas. There is a standard of analysis that may be common, the result of academic training. But that two people both have a doctorate does not mean they think alike.

Another criticism leveled at the Central Bank is that its members reflect the thought of only one segment of the population—that of the financial markets—and are therefore out of touch with the reality most Brazilians experience.
Our understanding is that the Central Bank is very much in touch with people’s reality. The proof of that assertion is what I call [our] focus on results. In my professional career, I have always believed that results, and not opinions, must be used to measure an act. That being said, it is enough to look at what has happened during the past several months. At the beginning of the year, the critics were saying that monetary policy did not work in Brazil—that the Central Bank would be implementing too costly a policy because inflation would not diminish. The critics were wrong. They also said that the Central Bank was far removed from reality because our monetary policy would not work in Brazil. Again, the critics got it wrong. In September, we had the greatest trade surplus in history and a surplus in the balance of payments. The results have shown that the Central Bank was right.

Inflation and the exchange rates are under control, but the policy of high interest rates has paralyzed the economy. Hasn’t the Central Bank prescribed too much of the right medicine?
In our estimation, what we did was not only necessary but inevitable. The real market rate rises in relation to the SELIC (Sistema Especial de Liquidação e Custódia, or prime lending rate), as well as on projected inflation and uncertainty. Last year, the market anticipated that there would be a spike in inflation and, with the rise in uncertainty, the interest rate rose. That is what touched off a fall in economic activity this year. When the COPOM raised interest rates, the market began to believe that the Central Bank was adopting a serious policy. As a result, projected inflation and interest rates began to fall. With some adjustment, that situation generated renewed economic activity.

The policy adopted by the Central Bank also brought about internal criticism. Doesn’t that concern you?
There is not a Central Bank anywhere that has ever adopted an inflation-fighting policy and met with unanimous, national applause. The situation is like a doctor treating a sick patient. No one praises the doctor because he is using strong medicines, but everyone is happy when the patient recovers. That is what is happening with the country now.

You have been using medical metaphors, like finance minister Antônio Palocci. Are you training to be finance minister as well?
We both habitually use these kinds of metaphors, and I very much enjoy talking with him. But I think those metaphors aptly describe the situation in Brazil today. We are leaving convalescence and preparing to run the marathon.

So what you’re saying is that the responsibility for anemic productivity does not rest with the Central Bank, but with market uncertainties?
If the Central Bank had not adopted a policy of monetary belt-tightening, we would be faced with still more problems. It’s not that the Central Bank is being tough. If the economic actors believed that the Central Bank was weak, the interest rates would not fall. Worse, they would rise even more, and economic activity would deteriorate.

Are you not concerned by the fall in income, the increase of “informality” [illegality] in the labor market, and high unemployment?
I am very saddened by the rise in unemployment and the fall in real wages for workers. It was in order to solve those problems that I left my highly paid job in New York. I wanted to use my professional experience—with the help of other friends—to help the country. It is important to make one thing clear: It was not the Central Bank that brought about the crisis in the country. We are helping the country out of its economic crisis. I am concerned, but I have not lost optimism, because I believe that we are taking the right measures. Again, I need to emphasize that all the economic indicators attest to our success. Economic recovery is the next step.

Is Brazil ready to grow again without facing blackouts or truckers’ strikes?
The answer to that question will be given by the entrepreneurs, as they start making investments that will eliminate the fits and starts in productivity. There is no doubt that the Brazilian economy is structured toward growth. The fundamental precondition for that is predictability and stability. No one invests without knowing the future.

You are known as the “interest-rates man.” How has your life been as president of the Central Bank?
Those not ready to face criticism should never join the Central Bank. That institution cannot seek an easy popularity at the risk of leading the country toward bankruptcy and hyperinflation. It is not possible to manage the Central Bank by taking an opinion poll at every moment. If that were the case, the Central Bank would not need to exist. The Central Bank must look forward, following the best available experience in the world.

On different occasions, Vice President José Alencar criticized the Central Bank for its interest-rate policy. What effect does that have on your team and its work?
The Central Bank views the vice president’s opinions with all due respect. In my personal case, I have been friends with him for some time. But we must do what we judge to be correct.

Several analysts are saying that your prescriptions are very orthodox. Will the formula be the same from now on?
That adjective confuses things. It is not a question of being heterodox or orthodox. There are successful and unsuccessful experiments. In Brazil, we have tried all the heterodox policies possible: price controls, capital controls, price indexing, confiscation of assets, and a series of other things. We failed at every turn. In Brazil, it wasn’t orthodoxy that failed, but heterodoxy. We are applying policies that were successful in other countries during the second half of the 1990s. What worked in countries like England, France, New Zealand, and Australia is what is being done in Brazil. Now we are no longer winging it.

With the end of the technical recession announced by the IBGE [Brazilian Institute of Geography and Statistics], can we expect more boldness from the Monetary Policy Committee in the coming months?
The last minutes of the Monetary Policy Committee proceedings pushed the limit of the secrecy requirements by saying that there was room for a fall in interest rates from that point on. If we were to say more, we would be saying what we do not yet know. It is exactly for that reason that the Monetary Policy Committee meets once a month and not once a year.

You have complained that the market has not listened to you. Do you believe that indicates a communication or a credibility problem for the Brazilian Central Bank?
I will answer that question with the results. In January, when the Central Bank announced that the goal was to get seasonally adjusted inflation to 8 percent, the market reacted by making the projected inflation hover around 12 percent. So it’s clear we had a problem of communication or of credibility. Today, the projected inflation of the market for the next 12 months is at 6.2 percent, in line with the goal fixed by the Central Bank. In other words, that problem has already been solved.

You were at FleetBoston Financial before this. What is it like to be on the other side of the counter?
What has changed for me has been the focus of my work. Before, my focus was a bank. Directors of financial institutions seek to manage their business, its clients, employees, and shareholders as best they can. Now I have to do my job by paying attention to what is best for the country. It is really a unique moment. I have the opportunity to put into practice what I have learned over the years.

What is your take on the merger of large banks in the United States?
In the United States, only a certain amount of concentration is allowed under the law. Over there, there are 8,000 financial institutions. I believe the mergers bestow more scale and leverage-power, but they can also bring disadvantages. The business may lose its focus or efficiency. This is the famous dynamic of the market.