Lula resumes attacks against Brazilian central bank governor

President Luiz Inácio Lula da Silva resumed his criticism of central bank governor Roberto Campos Neto after the monetary authority decided to keep the Selic reference interest rate unchanged and signaled that it will likely remain at the current level for the rest of the year.

In a decision announced on Wednesday, the central bank maintain the interest rate at 10.5%, ending an easing cycle that began in August 2023, when the Selic was at 13.75%. Since then, the monetary authority delivered seven consecutive reductions to bring the rate down to its present level.

"We only have one thing out of place in this country: the behavior of the central bank... a governor who has a political agenda, who is working to damage the country. There's no explanation for the interest rate being what it is," Lula said in an interview with local radio broadcaster CBN.

Since he took office in January 2023, Lula has repeatedly criticized the central bank governor for acting too timidly with interest rate reductions.

Campos Neto was appointed by Lula’s predecessor, Jair Bolsonaro, and once his four-year mandate ends in December, Lula will be able to name a successor. He has already appointed four of the nine central bank directors since coming to power.  

However, until Campos Neto's term ends, Lula fears that maintaining a high interest rate could stymie economic growth and affect his approval ratings, which have been trending downward despite some recent respite thanks to the positive performance of the economy in the first half of this year.

"There's room for a reduction in president Lula's approval, especially if we consider that there's a possibility of an economic slowdown during the second half of the year," Mário Sérgio Lima, an analyst at Medley Global Advisors, told BNamericas.

After the central bank decision, analysts now expect the base rate to remain unchanged for the coming months.

"The Brazilian central bank kept the Selic rate unchanged at 10.50% and with the headline inflation rate set to rise further in the coming months, we see no room for a resumption of the easing cycle this year," William Jackson, chief emerging markets economist at Capital Economics, said in a research report.

After Lula's new criticism of Campos Neto, the Brazilian real depreciated against the US dollar in Thursday trading, closing at 5.46 reais to the dollar, the lowest it has been since Lula took office. The depreciation has come amid investors' fears that Lula could nominate a political ally as the next central bank governor, who would be more likely to cut interest rates when subjected to pressure from the president, without taking inflation projections into account.