Latin Finance - May 2008 - 75

henrique meirelles Ditch the Rearview Mirror by Dan Shirai enrique Meirelles began his banking career in the mid 1970s by starting up a small leasing business in Brazil for the Bank of Boston. A rapid rise to the very top of that institution ensued, and in 2003 he was named president of Brazil’s Central Bank, replacing Arminio Fraga who had held the post since 1999. It was no small mandate: Brazil’s ability to stick to a responsible fiscal and monetary path was in question as the Lula administration prepared to take over. Meirelles’ private sector background reassured markets, though by the same token, many who had not heard of him wondered if he had the grit to hold down the job and keep prices under control. When he took the post, inflation was 10.20%, while the Selic rate was at 25.50%. Today, the market sees 2008 inflation at 4.40% while the benchmark rate stands at 11.75%. Though criticized for zealous adherence to inflation targets that have kept interest rates high, the central banker is widely seen as the embodiment of Brazil’s sound, market-oriented policies. This has underpinned the country’s success in other areas, including foreign investment, debt management and capital markets. H The president of Brazil’s central bank sees the need for more reforms. Given the country’s recent history of stability, achieving them is no longer a far fetched notion. challenging in an economy like Brazil’s, which underwent four decades of generalized indexation mechanisms, and which now wants to rid itself of the bad habit of looking in the rearview mirror. Now, with inflation targeting and a credible monetary policy, the formation of inflation expectations is changing gradually. Various studies prove that this process is underway in Brazil, as has happened in other countries. What are some of the goals to improve the internal functioning of the economy? In the first place, it’s important to note that, beyond economic stability, several other actions were adopted in the past decade to increase the economy’s efficiency, with great success. I point to the opening of the economy, the end of protectionist policies in the IT sector, and the privatization program, for example. But it is also worth recognizing that Brazil’s economy still has a number of bottlenecks and the so-called “Brazil premium” is high, which reduces our external competitiveness. We need to make advances in tax reform – lifting taxes on investment and payrolls – and end the fiscal war between the states. We also need to take strides in improving infrastructure, especially in transportation and energy, and reform the labor legislation. We need to define more clearly the regulatory environment in certain sectors, especially those that require long term investment; to simplify the bureaucracy and speed up the judicial decision-making process. Basically, these are a series of reforms that will reduce the “Brazil premium” and boost the economy’s potential growth. LF Targeting inflation: Meirelles to the monetary decision-making process. And finally, this evolution was crowned in 1999 by the introduction of the inflation targeting regime, a key monetary anchor with full transparency and easy monitoring by society at large. What changes do you expect in the next 20 years for LatAm? LatAm will know how to follow the path of responsible policies and increase integration with the global economy, which will allow it to sustain growth, just as it will contribute to reducing social and regional inequalities. Brazilian rates are still among the highest in the world. What kind of conditions will permit them to come down to levels comparable to other stable LatAm economies? Building stability is a lengthy process. With the inflation targeting regime, Brazilians are slowly referring to the targets as a long term anchor as they adjust prices, salaries and contracts. In other words, adjusting to inflation ceases to be a backward-looking process and becomes a forward-looking process. That process is particularly What are Brazil’s biggest accomplishments? In the monetary realm, the Real Plan in 1994 returned monetary authority to the central bank. This authority was improved in 1996 with the creation of the Copom, which brought regularity and accountability May 2008 LATINFINANCE 75

Latin Finance - May 2008

Table of Contents for the Digital Edition of Latin Finance - May 2008