Studies indicate that the economy and society benefit from the independence of the Central Bank (BC), an understanding that was established from the 1980s onwards. It has been proven that high inflation rates used to arise from measures to force the BC to reduce the basic interest rate (in the case of Brazil, the Selic).
The base rate is a powerful instrument, which serves both to face inflationary outbreaks and to increase liquidity at certain times, as occurred in the 2008 financial crisis and the covid-19 pandemic, when their respective costs were minimized. Populist leaders can use this instrument for the inflationary expansion of economic activity, which generates uncertainty, inflation and a drop in growth potential.
A recent study published on the IMF blog highlights the economic and social costs resulting from the absence of an independent Central Bank (Strengthen Central Bank Independence to Protect the World Economy). “Everyone is harmed by high inflation, especially people who live on fixed income (salaries, pensions and pensions), who suffer the erosion of their income”, highlighted the study. This causes an increase in poverty and inequality.
“The old left still resists the idea, further proof of the inability to modernize its thinking”
Continues after advertising
All central banks in rich nations are independent. The same occurs in most South American countries. Nations that intend to join the European Union must have an independent central bank. Here, our BC was born in 1965 with an area to provide credit in favor of agriculture, industry and exports, which led to inflationary pressures. This contradiction disappeared with the reforms carried out in 1986 and 1987.
Since then, the BC has gradually acquired the basic functions of a modern central bank, namely, taking care of the stability of the currency and the financial system. Formal independence would only come, however, in 2021. Among the relevant countries in Latin America, we were the last to take this step.
The old Brazilian left still resists the idea, further proof of the inability to modernize its economic thinking and learn from successful public policies. Hence, it seems, the personal attacks on the president of the BC, treated as “this citizen” and accused of “not understanding Brazil”. Authorities publicly ask the BC to reduce the Selic rate or accelerate its fall.
Continues after advertising
This mistake is common among the political class and business community. On the eve of the Monetary Policy Committee meetings, leaders of trade associations call for a reduction in interest rates, as if it were a mere matter of will. Taking advantage of their independence, the president of the BC and the other members of the committee ignore such pressures. They can, therefore, correctly manage the Selic rate, allowing inflation targets to be met. Lucky us.
Our BC was recently voted the best in the world. The news hardly had the appropriate impact among those unable to learn and understand how this institution works. Who knows in the next generations.
Published in VEJA on April 26, 2024, issue no. 2890
Tags: Lucky independent
--
