Brazil’s Institutional Limbo

SÃO PAULO – International investors are watching closely as Brazilians prepare to vote in the second round of the presidential election on October 26. Their vote will not only decide who will be the country’s next president; it may also determine the future of the Central Bank of Brazil (BCB), and therefore the country’s macroeconomic trajectory.

While the incumbent president, Dilma Rousseff, supports the BCB’s existing institutional framework, her opponents contend that monetary policy is plagued by political interference, which would best be addressed by giving the BCB greater autonomy. But no candidate has yet advanced a proposal for reform that would reduce the scope for political interference while ensuring greater accountability and promoting financial stability. If Brazil is to sustain strong and stable economic growth, the central bank will need an overhaul.

Monetary policy has long played an important role in Brazilian politics. During the democratization process of the 1980s and 1990s, successive governments tried to tame hyperinflation, which reached 2,477% in 1993. The introduction of the “Real plan,” launched in 1994, managed to suppress annual price growth to an “acceptable” 22% by the following year. Riding on the plan’s success, its architect, Fernando Henrique Cardoso, a former economy minister, was twice elected President (in 1994 and 1998), underscoring voter concern about price stability.

Today, as central bankers in developed countries fret about the threat of deflation, Brazilian politicians are once again forced to respond to widespread fears about slowing growth and a return to high inflation. Unfortunately, the presidential candidates’ plans for the BCB fall short of what is required. Historically, Rousseff’s Workers’ Party (PT) has resisted giving the bank formal autonomy, and she has played a distinctly populist card during the campaign, arguing that BCB autonomy would hand too much control to private bankers.