(Bloomberg) — There are few, if any, leaders in the world who are more openly critical of central bankers than Brazil’s Luiz Inacio Lula da Silva.
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The reasons are increasingly clear as Brazilians feel the malaise of the weak economy. Nine months after policymakers fixed benchmark interest rates at 13.75%, capping dozens of rapid increases, household debt is piling up at a record level, banks are turning away from lending, and corporate bankruptcies are on the rise.
Much of this pain has been caused by the determination of central bank governor Roberto Campos Neto. Without it, he and his colleagues estimate, demand in the economy will not cool enough to fully bring inflation back to the country’s target level.
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But for Lola, this is nonsense. Campos singled out Neto in his speech, accusing the bank’s former CEO of stunting the country’s growth by making it too expensive for Brazilians to borrow money.
The spat between the two men highlights the growing danger across the global economy. Brazil’s central bank may have raised interest rates earlier and higher than others, but nearly all of them – from the Federal Reserve to the Bank of England – have risen to uncomfortably high levels for politicians.
Calls for an end to rate hikes are mounting in capitolures from Nairobi to Bogota to New Delhi, threatening to undermine the autonomy so crucial to central banks’ fight against inflation.
“The reality is that inflation will take longer to come down in Brazil, and it will take longer to come down pretty much everywhere,” said Silvia Matos, an economist at Fundacao Getulio Vargas, a local university and think tank. Tight global monetary policy has created an environment more prone to disagreements between governments and central banks. It’s a relationship that could get rockier.”
Squeezed at all levels
In Brazil, the pressure is evident at every level of the economy — from consumers to CEOs. That makes it easy for the 77-year-old Lula, whose political career has spanned presidential terms and prison sentences, to blame Campos Neto.
While inflation has already fallen by more than half from last year’s peak of 12% – it reached 4.2% in April – economists are divided on whether it will continue to cool. This uncertainty is prompting the Central Bank of Brazil to keep its key interest rate at its highest level in more than six years.
Campos Neto said that overall inflation has slowed sharply, but core prices have continued to rise at a rapid pace, acknowledging that Lula has the right to debate monetary policy.
High borrowing costs are among the reasons why household debt in Brazil is hovering at an all-time peak and automakers are closing production lines to avoid oversupply. Average interest rates on personal and mortgage loans in the country are 42% and 11%, respectively.
Borrowing at the company level is also becoming more difficult. Campos Neto’s interest rate hike made domestic debt markets more expensive even before dollar bond markets cooled due to the Fed’s most aggressive tightening cycle in a generation. New issues from Brazil – in both the domestic and international capital markets – have fallen flat.
There were only about 90 bond deals from Brazil this year as of mid-May, most of them in reals, worth about $11 billion, according to data compiled by Bloomberg. The data shows that this is a decrease of 51% compared to the same period in the previous year.
“The feeling that borrowing costs may remain high for a while creates a lot of uncertainty,” said Leonardo Ono, portfolio manager for credit at Legacy Capital, a hedge fund with $7.2 billion in assets under management. “Companies will have to deal with tougher policy rates for longer than expected, and at a time like this, cash flow and balance sheet position gets worse.”
Banks also cut back on lending, fearing exposure to more risks after retailer Americana SA revealed a $4 billion accounting gap that led to a shocking filing for bankruptcy protection. After being hit last year by bad loans, Banco Bradesco SA said caution is needed as interest rates rise. Banco Santander Brasil SA is still healing the wounds of its first-quarter profit drop of almost 50%.
Quit this job to seek support from unexpected sources. Meatpacker Minerva SA’s chief financial officer, Edison Ticle, said earlier this month that the beef exporter sacrificed the money to help fund some of its suppliers who were struggling to get financing on their own.
“We need to replace banks in financing our supply chain,” he said in an interview.
Company problem
The number of bankruptcy applications filed by Brazilian companies in the first four months of the year increased by 34.1% compared to the same period last year, according to corporate data analysis firm Serasa Experian. As Daniel Pegorini, CEO of Valora Gestão de Investimentos, says, the mostly high rates “accelerated the demise of companies that were already in trouble.”
“There will be no quick fix in the short term,” said Alberto Serentino, vice president of the Brazilian Retail and Consumer Association, a pressure group. “We need potentially lower interest rates and normalization of the private credit market so that businesses can breathe.”
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Toymaker’s dilemma
Things weren’t that bad even during the pandemic, said Marcelo Cardoso de Sa, a managing partner at a small Brazilian manufacturer called Light Toys. With retail sales fading, Marisa Lugas SA, one of the toy maker’s biggest customers, has pegged it a bill of 2 million reais ($395,000)—a huge amount for a stuffed animal maker with 400 employees.
Desperate to keep his business going, Cardoso sought financing to cover shortfalls. But the three bank offers he got were so expensive that he had to take out a personal loan to bring the price down to a level he could afford.
“Our finances have suffered, but we will keep trying,” he said.
Marissa, a fashion retailer, had been in talks for months with her creditors before she finally stopped paying Light Toys. A representative for Marissa said the company is in talks with its suppliers to find a solution. The playmaker is still waiting to receive the payment.
Steadfast
The more pressure on Brazilians, the more emboldened Lula will become—he has begun to characterize Campos Neto in his rhetoric—and the more serious the battle will become to keep the central bank free of the kind of political meddling that has caused so much economic chaos in the country. past.
However, it is likely only a matter of time until inflation eases enough for the central bank to loosen its grip on the economy. Traders in Brazil are now pricing in the possibility of a rate cut later this year.
For now, though, Campos Neto isn’t holding back.
He has championed central bank independence, which was only officially endorsed in 2021, and has staunchly defended the country’s inflation targets. While everyone wants lower rates, he argued, the consequences of escalating rate increases would be much worse—especially in a country with a history of hyperinflation.
The Central Bank of Brazil did not mention future interest rate cuts in the minutes of its latest meeting. Instead, officials said they were “worried” by expectations that consumer price increases will accelerate again. As he and his team see it, baseline measures that exclude more volatile items — such as food and energy — and analysts’ inflation expectations need to be tempered before they can lower borrowing costs.
Lula, in reference to him, criticized Campos Neto for the decision.
“He has no obligation to Brazil,” said the president. Brazilian retailers, businessmen and workers can no longer afford this interest rate. ”
– With assistance from Barbara Nascimento, Daniel Carvalho, Leonardo Lara, Jovana Belotti Azevedo, and Tatiana Freitas.
(Updates with recent comment from Campos Neto in tenth paragraph. An earlier version of this story corrected the spelling of New Delhi.)
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