Brazil’s Tombini walks tightrope at central bank

With his bookish lectures on inflation targeting and reserved personality, Alexandre Tombini hardly comes across as a daredevil.

Yet a tightrope walker is what is needed these days at Brazil’s central bank where the soft-spoken technocrat has struck a delicate balance in his first five months in charge.

Tombini has emerged from obscurity to try to prevent prices racing out of control in a country still scarred by a long history with runaway inflation.

He must also deal with constant pressure from government officials and business lobbies who oppose raising interest rates — already among the highest in the world — so as not to strangle an economic boom.

It is a difficult, some say impossible, act.

Tombini, 47, is seen as more open to taking risks than his predecessor in order to pull it off. Henrique Meirelles, a Wall Street veteran, rarely looked beyond the orthodoxy of using interest rates to control Latin America’s biggest economy.

Tombini has turned to other tools, inviting criticism he is not tough enough on inflation but also winning plaudits that he is getting the policy mix right.

“I think there’s been a change in how risks are weighed,” said Paulo Vieira da Cunha, a central bank director under Meirelles. “Without a doubt, under the Meirelles monetary policy committee, and especially in Henrique Meirelles himself, (we had) a person who was much more risk averse.”

Brazil, like other emerging markets, fared better than developed economies in the global financial crisis and is now trying to keep a lid on inflation without derailing economic growth. India and China have also raised interest rates and used other policy tools to balance their own sets of risks.

The stakes are high in Brazil: 12-month inflation has hit 6.51 percent, just above the top of the official target range. With Brazilians feeling the pinch from higher prices, inflation threatens to overshadow President Dilma Rousseff’s first year in office — thrusting a timid Tombini into the spotlight.

Tombini impressed Rousseff long before she was president. During the global financial crisis, he met with then-president Luiz Inacio Lula da Silva and Rousseff, Lula’s chief of staff, to explain how the central bank could help pump cash into the financial system as credit markets seized up.

A career central bank civil servant, Tombini also played a key role in shaping the bank’s current mission as part of the team that launched inflation-targeting in 1999 — a system that many credit with helping Brazil turn around its chronically underperforming economy.

Though he had long been tipped as a potential successor to Meirelles, Tombini took the helm of the central bank in a cloud of doubt. He was little known outside policy circles and many wondered if he had the skills to fend off political pressures.

Tombini had a rocky start. He was visibly nervous in his first televised news conference and struggled to get his message across to the market. But he now looks more at ease.

“He has refined his political skills and has learned to communicate better with the market and with the media,” said Jose Francisco de Lima Goncalves, chief economist at Banco Fator in Sao Paulo.

CHOPPY WATERS

Tombini inherited problems immediately when he took over in January. Global commodity prices were about to shoot up. Higher salaries and easy credit were firing Brazilian consumption. And inflation had closed out 2010 at a six-year high.

Since then, the central bank has raised interest rates three times to curb inflation, taking the benchmark rate to a lofty 12 percent from 10.75 percent.

The measured pace of hikes — slower than in Chile, for example — plus signals from the central bank that it will only meet its inflation target next year, suggest Tombini is taking a gradualist approach to avoid an abrupt economic slowdown.

He has also had to contend with mixed signals from his boss and other government officials. Rousseff has stressed that she will not let prices spiral out of control but also talks about the need not to choke economic growth.

Monica de Bolle, an economist at PUC university in Rio de Janeiro, shares a widespread concern that the government might accept the trade-off of strong growth with higher inflation.

“I feel the central bank has little autonomy: They won’t be allowed to pursue an inflation objective if it interferes with the growth target that I think exists,” she said.

Tombini has said the central bank has total — albeit informal — autonomy to set monetary policy, and that he is confident the bank’s anti-inflation strategy will bear fruit.

While the central bank last month hiked rates a smaller-than-expected 25 basis points, it also underscored the possibility of a “prolonged” period of tighter policy — wording what many interpreted as a sign that more rate hikes will come, no matter how politically unpalatable.

Economists have even begun to lower their outlooks for the benchmark IPCA price index this year after eight weeks of rising forecasts. In a weekly central bank survey, economists now see the IPCA ending the year at 6.27 percent — still above the center of the target range but nonetheless within it.

Yet dangers still lurk. A tight labor market and tensions in the oil-rich Middle East will pressure consumer prices for a while yet. And because a range of costs in Brazil are indexed to various inflation indexes, more price hikes are guaranteed.

COMMUNICATION CHALLENGE

Further muddying the monetary waters are the government’s so-called macroprudential measures, which Tombini says target stability in the financial system. Those measures include a hike in December in bank reserve requirements, reducing the proportion of their deposits that banks can lend.

More recently, in April, the government doubled a tax on personal credit, another move to clamp down on lending to brake a consumer spending spree that is helping to drive up prices.

The central bank has several times mentioned such measures as complementing — not replacing — interest rates. Economists in a central bank survey said the measures would have the same effect as 75 basis points worth of interest rate hikes.

“My take on the measures is positive, but not so positive with regard to the way they’re communicated,” said Murilo Portugal, head of Febraban, Brazil’s banking federation. “There’s confusion around the goals. Macroprudential measures are long-term and not short-term and look to reduce and prevent risks to the financial system, not fight inflation.”

Since last month, Tombini has been clearer in emphasizing the importance of the bank’s most traditional tool, the benchmark Selic interest rate, to contain rising prices.

But much is changing in Brazil under Rousseff. Meirelles’ conservatism served as a counterpoint to Finance Minister Guido Mantega, a leftist economist who advocated heavy government spending to stoke consumer demand.

While Mantega is still around, Rousseff has set out to prove herself a different president than her mentor, calling for fiscal discipline. If the government does cut the $30 billion it has vowed to slash from this year’s budget, the economy could cool even without further interest hikes, easing pressure on Tombini at the central bank.

But these are early days in Tombini’s tenure. Brazil’s history is littered with boom-and-bust cycles, and Tombini is well aware of the risks to the country’s hard-won prosperity.

“We’re doing everything that we think is needed to win this battle against inflation,” Tombini said in a recent television interview. “This isn’t a 100-meter dash, it’s a long process.”