Interview with the President of the Brazilian Central Bank, Henrique Meirelles, published in Veja on 5 May 2007.

Veja: Since you became president of the Central Bank, in 2003, inflation has fallen from 20% per year to 4%. Has the battle been won?

Meirelles: The country has acquired credibility in achieving its inflation targets, and this has allowed Brazilians to live with lower interest rates, which is great for the country. The Central Bank can never afford to give the impression that it is no longer committed to its policy of inflation targets. When the central bank of any country appears half-hearted, businesses put up their prices and inflation rises. As a consequence, interest rates also rise. The fact that battles have been won doesn’t mean we no longer have to fight.

Veja: Is it a legitimate criticism to say the Central Bank could have adopted a more lenient policy towards inflation to enable greater so as to permit greater economic growth?

Meirelles: The debate is legitimate, and it doesn’t apply only to Brazil. But it’s vital to remember that the disinflation process was implemented, and the good results demonstrate this. The challenge now is of another kind. Despite all the noise surrounding the issue of interest rates, Brazil currently has one of the lowest interest rates in its recent history. That’s no small achievement in a country that had one of the longest periods of hyperinflation in the world, accompanied by negligible rates of growth. Inflation doesn’t bring growth. It disorganizes the economy, has a destructive effect on savings, reduces the supply of credit, and undermines investment. The benefits of fighting inflation far outweigh the costs.

Veja: One hears in Brazil that even the Fed [United States Federal Reserve] is concerned with the level of employment, not just the level of inflation…

Meirelles: It’s a mistaken assumption. The economist Ben Bernanke, the current president of the Fed, said recently that the best way for him to contribute towards an increase in employment is to ensure that inflation remains under control. In the US, Germany and Japan there isn’t anyone who still says inflation is a strategy for creating employment. There used to be some doubt about that, but not any more. The principal task of the central banks is to protect the purchasing power of the currency, keeping inflation under strict control. A long, step-by-step journey was needed in order to attain the degree of knowledge we have now.

Veja: There is no consensus about this in Brazil.

Meirelles: I understand why not. Brazil’s long history of hyperinflation and heterodox economic plans has left a legacy of widespread lack of belief and great impatience with regard to any economic policy. Another reason is that the regime of inflation targets is still a recent thing in Brazil. It was established in 1999, less than eight years ago. Its auspicious results have still been insufficient to create a consensus.

Veja: Is the improvement in income distribution in Brazil due more to the control of inflation or to the increase in the minimum salary and to social programmes like the Bolsa Família [Family Allowance]?

Meirelles: There’s no doubt the fall in inflation has been of fundamental importance in improving income distribution. Not only because lower inflation preserves and even raises purchasing power for working people, but also because it preserves the value of the minimum salary and the Bolsa Família itself. The lesson the Central Bank is giving is that a more civilized inflation rate increases the population’s purchasing power. With that, you have a better distribution of income, which leads to the creation of more jobs, with higher salaries. This approach has already had positive results, but only recently. The thing now is to persevere with it. What’s at stake is the maintenance of the necessary conditions for Brazil to achieve sustainable growth, with greater investment and reduced social inequality.

Veja: Aren’t you worried by the rise in the value of the real against the dollar?

Meirelles: The dollar is falling against most of the world’s currencies. It’s a global phenomenon – a clear consequence of the US trade deficit. This issue has to be understood against the backdrop of what’s going on in the world economy. In the specific case of Brazil we have to remember that the real was very weak against the dollar in 2002. We arrived at the Central Bank in 2003 with the real in dire straits, significantly devalued. What happened after that? The economy began to show repeated signs of strength. This diminished the perception of risk with regard to Brazil. In the eyes of the world Brazil showed itself to be more solid and trustworthy. We’ve had big balance of trade surpluses, and the fundamental aspects of our economy have gradually improved. In these cases it’s natural for the value of the currency to increase. I’d say the exchange rate reflects this extraordinary period the Brazilian economy is going through. Also, the exchange rate is still within the average range of the past twenty years.

Veja: Nevertheless, doesn’t a cheap dollar lead to jobs being exported from Brazil?

Meirelles: It’s not true that Brazil is losing jobs. On the contrary, Brazil has been creating around 1.25 million formal jobs per year. Although the exchange rate has been unfavourable for some sectors, the general rhythm of the economy has been vigorous. The big companies have increased their productivity and globalised their production to an even greater extent. In other words, they’ve managed to overcome the difficulties deriving from the country now having a stronger currency.

Veja: The Central Bank tried to secure the value of the dollar by tripling its purchases of the US currency, but in vain. Has the Central Bank lost the capacity to intervene to affect the value of the currency?

Meirelles: The Central Bank has a target for inflation, not for the exchange rate. Having said that, our actions in the exchange market seek to take advantage of the current favourable situation in order to increase our reserves and reinforce the economy’s capacity to resist external shocks. In addition, the Central Bank reserves the right to intervene in the market when it sees situations in which, due to imbalances, the process through which exchange rates are formed undergoes distortions. It’s wrong to think that with these actions we’re trying to impose an artificial exchange rate. The international currency market amounts to more than a trillion dollars a day. No government has the power to impose exchange rates these days.

Veja: To a significant degree the good performance of the Brazilian economy is due to the favourable external scenario and the symbiosis between the US and Chinese economies. For how much longer do you think we’ll be able to count on this dynamo for wealth production?

Meirelles: The international panorama remains positive for Brazil. It’s clear that there’ll always be risks. The biggest risk at the moment is that inflation in the US will accelerate to the point where the Fed opts for a significant rise in the basic interest rate for the US economy. In that case it would clearly be necessary to pay especially close attention to the effect of the change in interest rates on the US and the world economy. History shows us that severe crises in the US affect all of us. No one is immune to the effects of jolts to the biggest economy in the world. The new and positive reality is that Brazil is better prepared to face external shocks than it was in the past. The external debt is no longer a problem, and our international reserves stand at more than 120 billion dollars.

Veja: Isn’t it curious that today the major risks are not those concerning the emerging economies?

Meirelles: The concerns are in fact centred much more on the US than on any emerging economy. But, here and there, there are still small emerging countries that are facing difficulties. The difference between now and ten years ago is that the largest emerging economies now have more solid foundations. The norm in the past was emerging countries in deep debt, with fiscal and trade deficits. This is now an exception. Most of them used to have fixed exchange rates, which attracted financial speculation. In macroeconomic policy, there used to be a lot of experimentation and baseless bravado. All of this brought volatility – it was an invitation to economic crisis.

Veja: What is your opinion of the recent rise in import duties on textiles and footwear to protect Brazilian industry from foreign competition?

Meirelles: Generally speaking, the greater the degree of openness the better for the economy, because this leads to increased competitiveness and productivity. On the other hand it is absolutely legitimate, for a certain amount of time, to protect specific segments of the economy that are labour-intensive and that are experiencing insuperable difficulties in surviving exposure to economic opening. It’s a policy that’s practised in the advanced economies without any great fuss. But it’s necessary to emphasise that such protection is not sufficient to solve the problem. The only sure way to do so is through the constant pursuit of greater productivity, not only in the affected sectors but throughout the economy. The efficient and proven means of stimulating this process is by implementing tax reform and reducing the social component of the tax burden for employers. It would be an error if the current mood of euphoria following the success of anti-inflationary economic policy were allowed to interrupt us on our path towards reforms. Without these reforms, no economic policy, however good, will be sustainable indefinitely.

Veja: Shares in Brazilian companies are rising strongly, with the Bovespa index now above 50,000 points. Do you see signs of a bubble in the stock market?

Meirelles: In markets where there has been an improvement in the underpinnings of the economy, as is the case with Brazil, there is always the risk of excessive exuberance, of excesses. If this is the case, corrections will necessarily follow. The important thing is for us to be attentive and to avoid providing monetary fuel in a quantity that inflates a possible bubble even further.

Veja: Over the past four years what were the most challenging moments for the governor of the Central Bank?

Meirelles: The most delicate period was between April and May 2003, during the time when the highest interest rates were applied by this government. Inflation remained high, over 1% per month. The medicine was bitter, but necessary. There was much pressure over the Central Bank. It was hard to endure the criticism but we knew that we were on the right pathway and close to achieving the aim. To drop the policy at that point would be throwing out the baby with the bathwater. There was another difficult point from 2004 until recently when the GDP (Gross Domestic Product) announced by IBGE did not either corroborate or capture the positive growth indicators in the economy accurately. It became clear that the economy was growing faster than had been estimated earlier. Indeed, without inflation. This is what sustainable growth is.

Veja: How did you react to the fall of the former finance minister Antonio Palocci, probably your main interlocutor within government?

Meirelles: It was a challenging moment for the country. Palocci had been a key player in the stabilisation process. The relationship of the Central Bank with the Ministry for Finance remains both professional and productive. Criticism has lost its strength. It became obvious that not only did the Brazilian monetary policy put inflation on a downward trajectory but also generated better income redistribution, improved buying power, stimulated demand, improved the organisation of the economy and, thus, improved the capacity to plan ahead for both families and businesses. It had been claimed that this could only happen if we relaxed our monetary policy. We did not and the results came. It became clear that best practice and the tested and tried international experience also work here. The pressures that we now suffer are of a different order.

Veja: What are the pressures now?

Meirelles: Pressures ensuing from an absurd, almost irrational delirium. It could be summarized in this way: as the house is in order, let’s mess it up! Some have asked, ‘If inflation is low, why not return to the relaxed monetary policy period? Why can’t we allow some freedoms?’ To allow oneself to become intoxicated with euphoria is the greatest risk that the country faces right now. Inflation is under control for the simple reason that it is maintained low by the Central Bank. It is no magic trick. If the Central bank relaxes, the inflation will come back. Inflation stops being a problem only when the monetary policy is correct. There are claims that the Central Bank is making a mistake because there are no inflationary pressures any longer and that the interest rates could be lower. I prefer to look at the situation in a different way. If inflation is low, it is because it is right. In this area there are no absolute certainties, but one of them has proved to be infallible: when some critics state that the Central Bank made a mistake, it is because it hit the bull’s eye.