(Bloomberg) -- President Luiz Inacio Lula da Silva said that his pick to lead Brazil’s central bank will not “owe any favors” to the government and can raise interest rates if necessary, even while indicating that he expects them to fall.
The leftist leader, who has repeatedly criticized the monetary authority for maintaining high interest rates since returning to office last year, is currently mulling his nominee to head the central bank, with current governor Roberto Campos Neto’s term set to end later this year.
“When the time comes to reduce the interest rate, he must have the courage to do it,” Lula said in a Friday morning radio interview. “And when the time comes to increase it, he must have the same courage. There is no magic in economics.”
The Brazilian real strengthened 0.5% on Friday morning as markets opened after Lula’s comments.
Analysts welcomed the comments, given Lula’s prior criticism of monetary policy.
“President Lula’s speeches have been positive in relation to monetary policy and the central bank for a few days,” said Gustavo Okuyama, a portfolio manager at Porto Asset. “This helps the risk environment.”
Rafael Ihara, chief economist at Meraki Capital, said the comments were the latest sign that the real’s sharp weakening in July and early August had caused a shift in tone.
“The presidential palace was in panic with a strong dollar, and now it is speaking the market’s language,” he said.
At the same time, Lula reiterated his view that there is no explanation for the bank’s decision to maintain the benchmark Selic at its current 10.5%. He said he “works with the expectation that the interest rate will start to fall, so that we can have more peace of mind.”
Policymakers have held rates steady since June, when they paused a nearly yearlong easing cycle in the face of a worsening inflation outlook. They indicated earlier this month that they will not hesitate to raise rates if necessary, and traders are fully pricing in a rate hike in September.
Monetary Policy Director Gabriel Galipolo, widely considered the favorite to become Lula’s pick to lead the bank, has said that a rate hike is on the table, and that all board members will do “whatever it takes” to lower inflation back to target.
As Lula’s government boosts public spending, central bankers are facing a strong domestic demand with record low unemployment and resilient services costs. Economic activity shoot past all forecasts in June at 1.4%, according to a central bank report published on Friday morning.
Lula said in the interview that he will talk to Senate head Rodrigo Pacheco about the nomination before choosing the bank’s next leader.
--With assistance from Maria Eloisa Capurro and Josue Leonel.
(Updates with market reaction and analyst comments from fourth paragraph)
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