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Brazil’s High-Speed Central Banker Takes On a Stalled Economy

Mario Sergio Lima

(Bloomberg) -- Brazil’s central bank used to have a favorite phrase it would plug into statements, warning that monetary policy should be conducted with “caution” and “serenity.”

Roberto Campos Neto, who arrived in the bank’s top job from the not–very-serene world of foreign-exchange trading, has scrapped it. And that may be a guide to the rest of his term.

The 50-year-old was accustomed to moving fast and taking risks as head of Banco Santander’s lucrative global treasury division. He seems to have brought that ethos into the sedate world of monetary policy, where the challenges are very different.

The biggest one for Campos Neto is to jump-start Brazil’s economy –- which only just avoided falling into recession last quarter -- without jeopardizing his predecessor’s success in anchoring inflation expectations.

He’s has already delivered two big surprises for investors during seven months in charge. Campos Neto lowered interest rates more than expected, launching what’s likely to be a cycle of cuts. And he sold dollars from the bank’s foreign reserves, for the first time in a decade.

‘Bolder Vision’

“From the very beginning, Campos Neto’s attitude has been different,” said Sergio Machado, a partner at local money-manager SF2 Investimentos. “The decision on the currency reserves showed a bolder vision that’s typical of a trader.”

At least some of the change is probably limited to style.

A tennis player and tech-lover who hits the gym almost every day and has studied blockchains, Campos Neto represents a surface contrast with his more cerebral and sedentary predecessor, the MIT-trained economist Ilan Goldfajn.

Yet nobody expects the new chief to risk undermining Goldfajn’s success in keeping consumer prices low.

After spiking above 10% in 2015 and 2016, when Brazil’s economy was stuck in its worst slump for a century, inflation has come down to 3.4% -- well below the bank’s 4.25% goal, and set to stay there.

Trigger-Happy?

“Inflation expectations in the short, medium and long term are on target or below,” said Mauricio Oreng, senior Brazil strategist at Dutch lender Rabobank. “Campos Neto has kept the gains achieved by the central bank under Ilan.”

That allowed him to cut the benchmark interest rate to a record low of 6% in July. He’s expected to cut a further half-point on Wednesday, and bring the rate to 5% by year-end.

Campos Neto’s uninhibited approach isn’t without risks, according to Andre Perfeito, chief economist at Necton Investimentos brokerage in Rio.

The new chief has done a “very positive job” so far, and as a former trader “he knows how the machine works,” Perfeito said. “But he may be faster at the trigger. And that could eventually leave him with less flexibility for future moves.”

Expensive Money

Brazil typically has expensive money. Unlike most big emerging markets, it’s kept the benchmark interest rate above the rate of inflation throughout this century.

But local and global shifts are likely to support Campos Neto’s move toward lower borrowing costs.

At home, Brazil’s central bankers have signaled that they think President Jair Bolsonaro’s pension reform will lower the so-called neutral rate of interest –- the rate that keeps growth and inflation stable. And dimming prospects for the world economy have been pushing borrowing costs lower almost everywhere.

Steady inflation may give Campos Neto room to pursue other goals – of which he has plenty.

His main mandate is price stability. But the unusual status of Brazil’s central bank -- it’s not fully autonomous from the government, and its chief has the right to propose legislation –- can open the way to a wider role.

Extortionate Loans

Campos Neto, who declined to comment for this article, has promised to advance a law that would secure the bank’s autonomy. (Goldfajn tried too, but failed to win enough lawmaker support.)

More broadly, he emphasizes the need to modernize Brazil’s business climate. One bugbear is foreign-currency rules that date back to the 1920s, and stipulate that an import can only be registered and paid for once it’s entered the country.

Campos Neto cites the government’s purchase of Gripen fighter jets from Swedish manufacturer Saab as an example of the law’s perversity. He likes to point out that if it was strictly applied, Brazil would’ve had to import the plane’s German-made turbines and then ship them to Sweden, before finally acquiring the finished product.

The central bank chief also wants to bring more technology, innovation and competition to Brazil’s lending industry -– a tangled web featuring multiple types of credit at often exorbitant costs. It’s commonplace for borrowers to end up paying 200% or more on some types of loan.

What Our Economist Says

“Campos Neto’s expertise in the financial industry, and his enthusiasm for technological advance, can be of great value in designing policies to foster greater competition in the banking system. I’d expect his main contribution to be in untangling the factors that cause Brazil’s banking spreads to be among the highest in the world.”

-- Adriana Dupita, Bloomberg Economics

Campos Neto has said the goal is to “remove barriers” so that the banking system can “fulfill its role of promoting an efficient resource allocation.”

He’s backed instruments like home-equity loans and reverse-mortgages as ways of making it structurally cheaper to borrow – without fueling inflation.

“He’s been focusing a lot on improving lending conditions and modernizing the central bank,” said Newton Rosa, chief economist at Sul America Investimentos in Sao Paulo. “You can really see his influence.”

To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Walter Brandimarte at wbrandimarte@bloomberg.net, Matthew Malinowski, Ben Holland

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