BRASILIA (Reuters) – After months of rancor, relations between President Luiz Inacio Lula da Silva and Brazil's central bank look poised for a period of sweetness and light – and that is exactly what worries some investors.
Gabriel Galipolo, 42, is expected to take over the bank on Wednesday. The former deputy finance minister has earned a reputation for economic views that sometimes stray from his predecessor's embrace of free markets but warm the hearts of left-leaning politicians.
While that should help ease months of seizing from a president exasperated by high interest rates, it could test that institution's newfound formal independence, six of its former directors told Reuters.
Galipolo takes over from central bank governor Roberto Campos Neto, an appointee of former President Jair Bolsonaro, in the first transition since a 2021 law that required heads of state to wait two years before naming their bank chief central themselves, in a move designed to boost the bank's autonomy.
The handoff will come under scrutiny after frustration with the government's spending plans triggered a market slump, sending Brazil's risk premium swell and its currency to record lows.
The central bank declined a request for comment from Galipolo, who now serves as one of its policy directors.
Galipolo and Campos Neto have played down their differences and promised continuity in a shared news conference on December 19.
Now leading the country in his third non-consecutive term, Lula praised Galipolo in a social media video on December 20, promising financial discipline and a hands-on stance towards the central bank.
Concerns remain, however, about a change in monetary policy, dating back to a split policy decision in May when Galipolo and three other members appointed by Lula voted for a larger rate cut than the majority appointed by Bolsonaro. Starting in January, Lula's picks will hold seven of the nine seats on the central bank's rate-setting committee, or Copom.
All five of the central bank's rate decisions since May have been unanimous, including a larger-than-expected 100 basis point increase in December that came with surprise policy guidance from a planned increase of the same size in January and March 2025.
Despite the united front and hawkish rhetoric from Galipolo, who has promised independence from Lula, some economists say the market remains unconvinced.
“The forward guidance was announced precisely because there were concerns,” said former central bank director Alexandre Schwartsman, who was appointed during Lula's first term in 2003. “It is a symptom, a recognition that there are serious doubts about how (Galipolo) will behave , is it a symptom. whether it will be truly independent or not.”
“We will see the true result after March,” he added. “Until then, the ghosts of Copom past will hold sway.”
LONG SHADOW
One such illusion is that of Alexandre Tombini, the last central bank governor appointed by Lula's leftist Workers' Party. On its watch at the end of 2012, Copom cut rates and kept them at an all-time low despite the fact that inflation was shooting away from the official target.
Many economists criticized Tombini for bowing to pressure from then-President Dilma Rousseff to keep borrowing costs low, adding to imbalances in Brazil's economy that eventually plunged the country into its worst recession in decades.
Lula's allies instead cite his relationship with Henrique Meirelles, whom he tapped to run the central bank during his first two terms from 2003 to 2010 when aggressive monetary policies eventually paved the way for a robust economic boom .
Meirelles told Reuters he was confident Lula would respect the independence of the central bank as he had in his previous terms.
“If it's good for the country, it's good for the government. As long as Lula trusts this, relations are likely to become less tense,” Meirelles said in a telephone interview. , adding that the biggest concern for investors is Brazil's swelling public debt. .
Brazil's Treasury predicts that the country's gross debt will have increased by 10 percentage points over Lula's term to 81.7% of GDP by 2026, which is considered exceptionally high among emerging market peers.
With less than two years before the next election, aides say Lula has been particularly impatient about obstacles to economic growth, including high interest rates.
Relations with Campos Neto were also soured from the start after the central bank chief voted in the 2022 election wearing a football shirt favored by Bolsonaro's supporters. Adding insult to injury, he attended a dinner in his honor in June hosted by Sao Paulo Governor Tarcisio de Freitas, seen as one of Lula's strongest challengers in 2026.
Campos Neto has said that central bank officials can be close to political actors while maintaining their independence.
Lula's baggage with Campos Neto aside, some say his personal relationship with Galipolo, whom he has called a “gift” and a “golden boy,” may have moved too far to the other direction.
Galipolo joined Lula for bilateral meetings with foreign heads of state in Rio de Janeiro during the summit of the Group of 20 major economies in November and tagged along with Finance Minister Fernando Haddad for meetings in Washington the previous month, the type of events from which Campos Neto was conspicuously absent.
Still, opposition lawmakers have praised Galipolo's qualifications and a Senate committee unanimously approved his nomination.
With economic growth around 3.5% in 2024 and record-low unemployment, tight monetary policy has faced limited public backlash. However, former central bank officials believe the real challenge for Gallipolo will come when the central bank needs to maintain its position as the economy cools and unemployment rises – a more sensitive issue for a government that is struggling on the left.
(Reporting by Marcela Ayres in Brasilia; Editing by Brad Haynes, Christian Plumb and Matthew Lewis)
