Rousseff Gives Tombini ‘Autonomy’ for Brazil Inflation Battle

Brazilian President-elect Dilma Rousseff pledged full “autonomy” for the country’s central bank as she appointed Alexandre Tombini to head the institution and bring the fastest inflation in 18 months back to target.

The 46-year-old Tombini may be assisted in that task by Finance Minister Guido Mantega, who during a press conference yesterday to announce his reappointment said he would cut spending and avoid new expenditures. Tombini takes office Jan. 1 after serving as a board member since 2005. He replaces Henrique Meirelles, 65, Brazil’s longest-lasting central bank chief.

“Rousseff’s choice of Tombini reinforces her desire to have the finance ministry and central bank aligned,” said Luciano Rostagno, chief strategist at CM Capital Markets, a Sao Paulo-based stock and futures brokerage. “Inflation is surprisingly high and will require more spending control.”

Traders are increasing bets Tombini may need to raise rates at his first monetary policy meeting in January, Bloomberg estimates based on interest-rate futures contracts show. Policy makers boosted borrowing costs this year by 200 basis points, or 2 percentage points, to 10.75 percent from a record low.

“Dilma wants to reduce the noise between the fiscal and monetary authorities, so this is good news,” said Zeina Latif, a senior economist at RBS Securities Inc. in Sao Paulo.

Yields on Brazil’s longer-term rate futures tumbled yesterday after Mantega said he will reduce fiscal spending, easing pressure on the bank to raise borrowing costs.

Inflation Target

Consumer prices as measured by the benchmark IPCA-15 gauge rose 5.47 percent in the year through mid-November, the national statistics agency said this week. The central bank targets 4.5 percent inflation, plus or minus 2 percentage points.

Rousseff also announced yesterday that Miriam Belchior will replace Paulo Bernardo as planning minister on Jan. 1. Belchior currently oversees a $293 billion investment plan to improve the country’s infrastructure.

Mantega, Belchior and Tombini will form Brazil’s monetary council, responsible for setting the annual inflation target and the long-term interest rate, used by the state development bank.

Meirelles said yesterday that “this is the right moment to end the mission,” and that he will remain at the post until the end of President Luiz Inacio Lula da Silva’s administration on Dec. 31. Tombini is an “excellent choice,” Meirelles said.

Tombini said yesterday that Rousseff assured him the central bank will have the independence it needs to fight inflation.

‘Total’ Autonomy

“Dilma told me that in this regime there’s no half autonomy, but total operational autonomy,” said Tombini, who was part of the group that designed Brazil’s inflation-targeting system.

Central bank policy makers are appointed and removed by the country’s president and aren’t limited by set terms. Lula appointed Meirelles to replace Arminio Fraga even before being inaugurated on Jan. 1, 2003.

Lula granted Meirelles Cabinet-level status in 2003, ensuring the bank chief has a direct channel of communication to the president, a privilege that must be maintained, said former central bank President Carlos Langoni, director of the Getulio Vargas Foundation in Rio de Janeiro.

Before joining the Brasilia-based central bank, Tombini, who was born in Porto Alegre, in the southern state of Rio Grande do Sul, was the senior adviser to Brazil’s executive director at the International Monetary Fund.

Board Vote

Tombini, who has a doctorate in economics from the University of Illinois at Urbana-Champaign, will need to be approved by the Senate. He is one of the eight people on the central bank board who will vote to set the key rate at the Dec. 7-8 meeting. The individual votes aren’t made public.

“The fact that Rousseff is keeping Mantega is a good indication for markets that there will be some continuity, although policy may not be exactly the same,” said Claudio Loser, a former Western Hemisphere director for the International Monetary Fund, who now runs the Centennial Latin America research company based in Washington.

The extra yield investors demand to hold Brazilian debt rather than U.S. Treasuries has fallen to 189 basis points from 1,446 basis points on Dec. 31, 2002, the day before Lula took office, according to JPMorgan Chase & Co.’s EMBI+ index.

Latin America’s biggest economy will expand 7.6 percent this year, the fastest pace in more than two decades, according to the median forecast in a central bank survey of about 100 economists.

Outlook for Rates

Traders are wagering policy makers will be forced to resume rate increases early next year and push the benchmark to as high as 12.75 percent by the end of 2011, according to Bloomberg estimates based on rate futures.

Some analysts pointed to Mantega’s past support for higher spending as a possible source of tension with the new central bank chief.

“Tombini is a symbol of responsible monetary management,” said Roberto Padovani, chief strategist at Banco WestLB do Brasil SA. “At the same time, Mantega represents an expansionary fiscal policy.”

Alongside Tombini and Belchior at a press conference yesterday, Mantega told reporters that Rousseff will cut fiscal spending, avoid new expenditures and reduce the amount of capital the Treasury may transfer to the state development bank next year. Rousseff wants Brazil to grow more than 5 percent in the next four years, without pressuring inflation, Mantega said.

“It seems that we’ll have more of the same with this economic team,” Jankiel Santos, chief economist at Espirito Santo Investment Bank, said in a telephone interview. “The biggest challenge for Tombini will be convincing the finance minister that public spending influences inflation dynamics.”