Author: Marcela Ayres
BRASILIA (Reuters) – After months of friction, ties between President Luiz Inacio Lula da Silva and Brazil’s central bank appear poised for an era of sweetness and light – which is exactly what worries some investors.
Gabriel Galipolo, 42, is set to take over management of the bank on Wednesday. The former deputy finance minister has gained a reputation for economic views that sometimes diverge from his predecessor’s embrace of the free market but warm the hearts of left-leaning politicians.
While that should help calm months of sniping by a president embittered by high interest rates, it could test the institution’s newfound formal independence, six of its former directors told Reuters.
Galipolo takes over from central bank governor Roberto Campos Neto, appointed by former president Jair Bolsonaro, in the first transition since a 2021 law that required heads of state to wait two years before appointing their own central bank chief, in a move designed to strengthening the bank’s autonomy.
The handover will come under scrutiny after frustration with the government’s spending plans triggered a market crash, sending Brazil’s risk premium and its currency to record lows.
The central bank declined a request for comment from Galipol, who now serves as one of its policy directors.
Galipolo and Campos Neto downplayed their differences and promised continuity at a joint press conference on December 19.
Now leading the country in his third non-consecutive term, Lula praised Gallipol in a video on social media on December 20, pledging fiscal discipline and an unapproachable attitude towards the central bank.
Concerns remain, however, about the changes in monetary policy, dating back to a divided policy decision in May when Galipolo and three other Lula appointees voted for a bigger rate cut than the majority appointed by Bolsonaro. Starting in January, Lula’s picks will occupy 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 bigger-than-expected 100 basis point hike in December that came with surprise policy guidance of planned hikes of the same size in January and March 2025.
Despite the united front and the hawkish rhetoric of Gallipoli, who has promised independence from Lula, some economists say the market is not convinced.
“The nonsense guidance was issued precisely because there is concern,” said former central bank chief Alexandre Schwartsman, appointed during Lula’s first term in office in 2003. “It is a symptom, an acknowledgment that there are serious doubts about how (Galipolo) will behave, whether whether they will be truly independent or not.”
“We will see the real outcome after March,” he added. “Until then, the ghosts of Copom’s past will reign.”
LONG SHADOW
One such phantom is that of Alexandre Tombini, the last central bank governor appointed by Lula’s leftist Workers’ Party. During his watch in late 2012, Copom cut rates and kept them at record lows despite inflation falling far short of the official target.
Many economists criticized Tombini for bowing to pressure from then-President Dilma Rousseff to keep borrowing costs low, contributing to imbalances in the Brazilian economy that eventually plunged the country into its worst recession in decades.
Lula’s allies instead cite his relationship with Henrique Meirelles, whom he handpicked to lead the central bank during his first two terms from 2003 to 2010 when aggressive monetary policy eventually paved the way for a strong economic boom.
Meirelles told Reuters he was confident Lula would respect the central bank’s independence as he had in previous terms.
“If it’s good for the country, it’s good for the government. As long as Lula believes in it, relations will probably become less strained,” Meirelles said in a telephone interview, adding that the biggest concern for investors is Brazil’s growing public debt.
Brazil’s finance ministry predicts the country’s gross debt will climb 10 percentage points during Lula’s tenure to 81.7% of GDP by 2026, considered exceptionally high among emerging markets.
With less than two years until the next election, aides say Lula has been particularly impatient about obstacles to economic growth, including high interest rates.
Relations with Campos Neto also soured from the start after the central bank chief voted in the 2022 election wearing the soccer jersey favored by Bolsonaro’s supporters. Adding insult to injury, he attended a dinner in his honor in June held by Sao Paulo Governor Tarcisio de Freitas, who is seen as one of Lula’s strongest challengers in 2026.
Campos Neto 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 Gallipoli, whom he called a “gift” and a “golden boy,” may have gone too far in the other direction.
Galipolo joined Lula at bilateral meetings with foreign heads of state in Rio de Janeiro during the Group of 20 summit in November and flagged him down alongside Finance Minister Fernando Haddad at meetings in Washington a month earlier, the kind of event that Campos Neto was from. especially absent.
Still, opposition lawmakers praised Gallipol’s qualifications, and a Senate committee unanimously approved his nomination.
With economic growth of around 3.5% in 2024 and a record low unemployment rate, tight monetary policy has met with limited public reaction. However, former central bank officials believe the real challenge for Galipolo will come when the central bank needs to maintain its position as the economy cools and unemployment rises – a more sensitive issue for the left-leaning government.
