The inflation buster
When Ilan Goldfajn took the reigns at the Central Bank of Brazil in June 2016, he faced the unenviable task of grappling with annual inflation hovering above 9% while trying to avoid worsening Brazil’s longest ever recession. Admittedly, the challenging economic conditions somewhat aided the impressive drop in price rises that followed. But analysts have no doubt that Goldfajn’s unwavering commitment to the bank’s inflation target has been the central factor in turning around how investors view monetary policy in Latin America’s largest economy.
“Ilan Goldfajn has restored the credibility of Brazil’s central bank and the inflation-targeting process,” says Graham Stock, head of emerging market sovereign research at BlueBay Asset Management. “He has been very orthodox in his approach to inflation-targeting, and has managed to stay above the fray on the political side.”
While Brazil’s political drama shows no signs of slowing and growth is — though now positive — still low, on the monetary side of the equation the country is progressing rapidly.
In August, annual inflation stooped to 2.46% — the lowest level in 18 years. Moreover, Brazil has achieved this even as the central bank has made 600bp of rate cuts in the past 12 months.
Simultaneously, data from Euromoney Country Risk shows that Brazil’s economical assessment has improved — from 53.58 in the third quarter of 2016 to 53.97 in Q3 this year.
Gentle start
Some feel that the country is reaping the rewards of not cutting too quickly, too early. “Goldfajn was clever in starting quite slowly with monetary easing,” says Edward Glossop, Latin America economist at Capital Economics. “He was very hawkish even though there was an economic case for rate cuts, and this won him credibility with the markets.
“This then allowed the bank more room to cut more aggressively later on.”
Remaining hawkish during his first six months “rebuilt the credibility” of the inflation target, says Stock.
Since then, Goldfajn has been “cautiously realistic” and “not shied away from highlighting risks both fiscally and in terms of prices”, says the BlueBay economist.
Speaking to GlobalMarkets, Goldfajn himself says that showing commitment to lower inflation was key. “You need to show that you are committed to lower inflation, that you are committed to the inflation target, that you’re not willing to accommodate the target, which was one of the demands [of some people] last year,” says the governor.
So impressive has the reduction in inflation been that the National Monetary Council in June lowered the inflation target for the first time. The target will drop from 4.5% plus or minus 1.5% to 4.25% in 2019 and 4% in 2020 — with the tolerance range remaining the same.
Goldfajn is keen to point out, however, that the central bank’s work is more than monetary policy. In December, it launched the so-called BC+ agenda, a series of reforms that aims to enable cheaper credit and increase financial inclusion and education, among other factors.
“We have taken reforms one by one […] we are sending a project to forge a new relationship between the Treasury and the Central Bank,” he said. “It is not only monetary policy.”