Lula Puts an Ally on Track to Lead the Central Bank He’s Fought

Martha Beck and Maria Eloisa Capurro
·7-min read

(Bloomberg) -- If President Luiz Inacio Lula da Silva gets his way, Gabriel Galipolo will be the next head of Brazil’s central bank. For now, he will have to settle for having Galipolo as his most important delegate inside the monetary authority he has raged against since taking office in January.

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Brazil’s Senate on Tuesday approved the appointments of Galipolo and Ailton Aquino to open seats on the bank’s board of directors, positions that will give them a say over the benchmark interest rate, which remains at a six-year high of 13.75%.

The move is the opening step in the bank’s first transition of power since the 2021 enactment of a law guaranteeing its autonomy. Six months into his public feud with an institution dominated by his predecessor’s appointments, Lula will begin to shape its future. Two more seats are set to open on the nine-member board in December. Bank chief Roberto Campos Neto – the target of much of Lula’s ire – and two other directors will depart at the end of 2024.

Galipolo, a 41-year-old former local bank president and Finance Minister Fernando Haddad’s right-hand man, is at the center of it all. His status as Lula’s darling and chief interlocutor with investors, along with the expectation that he is Campos Neto’s successor-in-waiting, has left analysts searching for clues about how he will approach the job as the board’s director of monetary policy.

Some expect him to play the mediating role he assumed during last year’s presidential election and later as Haddad’s deputy finance minister. Others fear he is part of Lula’s effort to exert the sort of political influence over the bank that the new law seeks to prevent.

The approach he takes will shape the immediate future of Brazilian monetary policy, which has become a global avatar of intensifying political frustrations over high interest rates. It may also provide an indication of what the central bank’s newfound autonomy — which Lula has questioned — will look like in practice.

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Most analysts agree that Galipolo will take a less restrictive approach to monetary policy, especially if it appears to be limiting growth, than the board’s current membership.

He “seems to focus more on growth, and be more flexible on his support of the inflation target, which makes him structurally more dovish,” said Natalie Victal, the chief economist at Sao Paulo’s Sul America Investimentos.

Bridge Builder

Both Galipolo and Campos Neto have downplayed the importance of his appointment, especially amid growing expectations that rate cuts will begin soon. In an interview, Galipolo argued that he wanted to help the government “align monetary policy and fiscal policy,” not overhaul the bank’s approach.

“My role is to establish dialogue and build bridges,” he told Bloomberg News in June. “I have a great dialogue with the board of the central bank, and I talk to them a lot.”

Campos Neto has made the case that Galipolo’s presence will help convince Lula that the bank’s policy is driven by technical assessments, not political opposition. Disagreements, he’s said, are part of the process of establishing the bank’s credibility as an autonomous institution.

He has cited the Bank of England, where split votes are common. The Federal Reserve, meanwhile, has faced internal disputes, criticism from Republicans and Democrats, and fading public confidence. But its independence endures.

“We have directors that will enter the board with different opinions, and that’s part of the game, that’s part of institutional gains,” Campos Neto said at a news conference last week. “We’ll release a statement that reflects a consensus, and we’ll detail the debate in our minutes. But everything will be done in a technical way.”

Not everyone is so sanguine.

Lula’s criticism of the autonomy law and calls for the Senate to hold Campos Neto “accountable” have sparked concern about the bank’s independence and drawn comparisons to previous Workers’ Party governments.

Under former President Dilma Rousseff, the government championed lower rates even as consumer prices rose, and the bank’s reaction sparked speculation it was aiming for an inflation rate near the top of its tolerance range. A distrust of monetary policy caused analysts to keep inflation expectations above targets, eventually leading to sharp interest rate hikes and a recession.

“Galipolo is entering with a mission,” said Alexandre Schwartsman, who was on the board during Lula’s first presidency and worries about a replay of the Rousseff era. “Monetary policy won’t be aimed at bringing down inflation. Instead, it will serve the political agenda of the government.”

Galipolo avoided criticism of current interest rates during his Senate hearing. But comments about autonomy raised questions about his view of the monetary authority, which he said needed to respect the “democratic will” of voters.

“Central bank autonomy is often understood as if it were autonomy from the democratic process,” he said. “It is necessary to understand that it is obvious that it is the democratically-elected power, the will of the ballot box, that determines the economic destiny of our society.”

Changing Outlook

Unlike many close Lula allies, Galipolo does not hail from the ranks of the Workers’ Party or have a decades-long relationship with the president. Although he has ties to other party members, Galipolo only met Haddad in 2020, thanks to a mutual friend.

He is an enthusiast both of using government spending to boost growth and of public-private partnerships and concessions.

“There seems to be an anxiety in economics to try to identify a person’s line of thought,” he said. “I identify with several different people. I identify myself, for example, with Fernando Haddad. I prefer not to be put in a box.”

As deputy finance minister, Galipolo helped craft the policies that have helped calm investors’ fears about this government. He’s confident that the plan is working.

“The fact is that the exchange rate is at another level, it has appreciated considerably. Long-term interest rates have been falling, inflation is falling,” he said. “All these things demonstrate a positive scenario for the economy.”

Read More: Brazil Finance Chief’s Market-Friendly Pose Alienates the Left

Brazil’s outlook has changed since analysts greeted Galipolo’s May nomination with worries that it might lead to premature rate cuts. Inflation has cooled to within the target range, and business leaders and lawmakers have joined Lula’s calls for an immediate start to an easing cycle. Many analysts now predict it will begin in August, coinciding with Galipolo’s first rate decision meeting.

“Campos Neto is winning the inflation battle, and things are going in the right direction after his pledges for patience and serenity,” said Silvia Matos, an economist at the Getulio Vargas Foundation. “There’s always risks of more leniency toward inflation, but we have to see how Galipolo behaves.”

Galipolo is joining a board that Campos Neto described as “very divided” at its last meeting, with the bank chief predicting that split decisions — rather uncommon at a bank traditionally centered around the views of its president — are on the horizon.

The autonomy law’s overlapping terms, meanwhile, may be turning it into an institution more similar to Mexico’s monetary authority, whose directors often publicly express opposing views.

“It’s part of the process of getting used to an independent central bank,” said Caio Megale, an economist at XP Investimentos in Sao Paulo. “The first new thing was having a governor who wasn’t picked by the president, and now we’ll have the second novelty which is having a bank director who is not 100% aligned with its chief. But that’s common among other central banks.”

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