If it takes two to tango, then Brazil’s new finance minister and the president of the central bank certainly need some night classes before they can perform jointly in public. Guido Mantega will seek to alleviate investors’ concerns when he arrives in Belo Horizonte tomorrow, as long-standing divergences with Henrique Mereilles have already sent conflicting signals to the markets.
“He has to come and sell Brazil. Not making it would be a mistake,” said Guillermo Mondino, head of emerging market research at Lehman Brothers. “Everybody is prepared to give him the benefit of the doubt. If he does not say anything outrageous, he will score big time and markets will calm down afterwards,” he said.
Indeed, Mantega’s initial intention to loosen monetary policy, which he expressed shortly after his ministerial appointment, sounded like a rebuff to the central bank’s ultra-cautious line. But president Lula acted quickly to confirm Mereilles’ autonomy and to defuse what could have degenerated in another crisis .
“Mantega is not Mereilles’ boss,” says a presidential aide. Indeed, since late 2004, the president of the central bank has enjoyed ministerial status. In practice, this means that as a state minister, Mereilles is now on par with the finance minister, and may only respond to Lula. The bank has enjoyed operational autonomy for several years, but this was never enshrined in the Brazilian legislation.
Following a short period of tension, Mantega eventually backed down. After calling for “civilized interest rates”, he endorsed the central bank’s “gradual decline” strategy. Furthermore, when he was president of the National development bank (BNDES), Mantega had called for a drastic cut in the bank’s benchmark long term rates from 9% to 7%. But as a new member of the National monetary council (along with Mereilles and the planning minister Paulo Bernardo Silva), he agreed on Friday to set the new rate at 8.15%.
So far, Mereilles seems to have gained the upper hand, but it is not clear whether the truce will be a lasting one. “No one yet knows what kind of relationship they are going to have,” a presidential source admits. “True, Mantega comes from the ‘developmentalist’ school [of thought], but he will have to adapt to the president’s economic policy, which combines a certain degree of orthodoxy with a social promotion bias.”