Brazilian central bank President Henrique Meirelles fueled record trading in short-term interest rate futures as investors bet — correctly — that he would hold off raising interest rates yesterday ahead of his decision on whether to run for elected office.
The bank’s move, which sparked the biggest split vote among board members in 14 months, raises speculation Meirelles is allowing political interests to interfere with monetary policy decisions as he faces an April 2 deadline on whether to run in October elections, said former central bank director Carlos Eduardo Freitas.
“He is a politician, he joined the Brazil’s Democratic Movement Party, he has political ambitions and this creates a parallel agenda,” Freitas, who served two stints as a central bank director over the past 25 years, said in a telephone interview. “It’s hard to be sure there was political influence, but it leaves a certain impression because there were enough elements to justify a raise.”
Yields on the overnight interbank contract for April delivery plunged four basis points, the most in three months, to 8.8 percent as trading volume soared to the highest since Bloomberg data began on the securities in 2003. The bank’s decision to hold the benchmark rate at a record low of 8.75 percent was a surprise to 30 of 57 analysts surveyed by Bloomberg who forecast an increase to at least 9 percent to stem inflation as Latin America’s biggest economy recovers.
Three Dissenters
Three of the eight directors voted for a half-percentage point increase to 9.25 percent, the bank said in a statement. That’s the most dissenting votes since January 2009, when three board members voted against a one-point rate cut. Policy makers are slated to next meet to set rates on April 28.
Zeina Latif, ING Bank NV’s chief economist in Sao Paulo, said the split vote “leaves room for interpretation” on how political pressure may have affected the board meeting.
“You can’t discard the market’s reading” that politics is impacting Meirelles’s decisions, said Latif. She said the deteriorating outlook for 2011 inflation should have led the bank to raise the rate a half-point yesterday.
The central bank doesn’t make comments on analysis or assessments of its monetary policy decisions, central bank spokesman Ribamar Oliveira said in a telephone interview. Meirelles, 64, said Feb. 26 that the central bank was ready to take “unpopular” steps to keep inflation in check and that the political calendar wouldn’t affect monetary policy.
Inflation Record
The former head of global banking at FleetBoston Financial Corp. joined the Democratic Movement Party, the country’s biggest, on Sept. 30, setting the stage to resume his political career. After giving up a seat in congress in 2002 to head the central bank, he may run for vice-president on the October ticket of president Luiz Inacio Lula da Silva’s chosen successor Dilma Rousseff, IstoE magazine reported March 10, without saying where it obtained the information.
Meirelles ruled out Feb. 11 a run for governor of his home state of Goias while keeping open the possibility of seeking a seat in the Senate or the vice-presidency. He said he would make a decision whether to run for office by the end of this month.
Thomas Trebat, executive director of the Center for Brazilian Studies at Columbia University and a former Citigroup Inc. analyst, said Meirelles wouldn’t jeopardize the credibility he earned over seven years at the bank by making a politically motivated decision now.
Meirelles has met the central bank inflation target in all but his first year in office. Arminio Fraga, who implemented the inflation targeting system in 1999, missed the target in two of the four years he headed the bank.
‘Above Politics’
“In economic terms, there is reason to almost canonize Meirelles,” Trebat said. “He has obtained that position by being above politics, by making decisions that could always be justified by fundamentals. Would he risk that legacy now?”
Roberto Padovani, chief economist at Banco West LB in Sao Paulo, said yesterday’s move was a “technical decision.”
“The central bank can wait to get clearer information on inflation and the pace of economic growth before acting,” Padovani said in a telephone interview.
Policy makers will raise the benchmark rate to 11.25 percent by year-end, according to the median forecast in a central bank survey of about 100 economists taken March 12.
Not ‘Convenient’
Inflation will quicken to 5.03 percent this year from 4.83 percent in the 12 months through February, according to the median forecast in the bank’s survey. The central bank targets inflation of 4.5 percent, with a two percentage-point band above and below that goal.
Consumer prices can jump more than 6.5 percent in 2011 should the central bank fail to act, Paulo Leme, chief Latin America economist at Goldman Sachs Group Inc., said in an interview before yesterday’s meeting. Leme, who forecast an increase to 9.25 percent, predicts the economy may expand 6.4 percent this year, the fastest pace in more than two decades.
Tony Volpon, a Latin America strategist at Nomura Holdings Inc., said yesterday that Meirelles’s decision to stay at the bank after showing interest in returning to politics is creating “unnecessary uncertainty” over monetary policy. He wrote in a note to clients last week that it may not be “politically convenient” for Meirelles to raise rates in his final move before starting a potential bid for the vice-presidency.
“Perhaps it would have been better for him to have stepped aside once he made the decision of seriously exploring a career in national politics,” Volpon said.