Arnaldo Rodrigues Neto e Júlia Almeira Abreu

According to the new law, the Central Bank president and directors will have a 4-year fixed term of office asynchronously to the term of the President of the Republic

On February 24, 2021, President Jair Bolsonaro signed into law Ancillary Law 179/2021¹, which establishes the Central Bank’s independence, mainly aiming to prevent any pressure from political parties from interfering in the agency’s decision-making.

Roberto Campos Neto, the BC’s [Central Bank] current president, despite losing his status as minister as the aforementioned law enters into force, asserts that it is a big step forward in institutional development: “Today is a great day for the Central Bank and a great day for Brazil. We are looking at an important step with the approval, on President Jair Bolsonaro’s part, of the law that guarantees Central Bank independence. Today will go down in history as a landmark in our country’s institutional development”.

The Brazilian Congress has been discussing the BC’s independence since 1991 and, with the Law taking effect, the performance of the directors is expected to be based exclusively on technical elements, focused on combatting inflation. The Central Bank has nine directors, one of whom is the institution’s president. Once nominated by the President of the Republic, candidates for office must undergo a hearing and vote in the Senate.

The text approved by Brazilian Congress does not change the composition of the Central Bank’s collegiate board but does establish a four-year term for the BC president and the other directors. Everyone can be reappointed to the office only once, for a term of the same length.

Without prejudice, price stability remains the fundamental purpose of the Central Bank, and it is also responsible for ensuring the stability and efficiency of the financial system, smoothing fluctuations in the level of economic activity and encouraging full employment.

The project’s approval, which counted on extensive efforts by the Executive and the Legislative powers, particularly Senator Plínio Valério’s authorship and Senator Telmário Mota and Deputy Silvio Costa Filho’s reports, relied on its widespread support from the Legislative Houses.

“Brazil has taken an important step with the independence of the Central Bank. This achievement is the result of a long process of institutional maturing, during which the benefits of an independent, transparent and responsible central bank have become clear to society,” said BC President Roberto Campos Neto. “Economic literature and international experience show that the independence of the Central Bank is associated with lower levels of less volatile inflation, without impeding economic growth,” he added.

See the main features of this Law²:

[Key:] Central Bank Independence; BC main purpose: ensuring price stability; BC secondary purposes: (fulfilled when doing so poses no risk to the primary purpose) ensuring the stability and efficiency of the financial system; smoothing fluctuations in the level of economic activity and encouraging full employment; Collegiate Board: will have nine members – the president and eight directors. All of them will be nominated and appointed by the President of the Republic, after being approved by the Federal Senate. The BC president and directors must have an untarnished reputation and knowledge that qualifies them for the role; BC president’s and directors’ terms of office: the terms of office of the BC president and directors will be four years, and will not coincide with that of the President of the Republic; directors’ terms of office will begin alternately (two per year). The BC president and directors may be reappointed once to the position; The BC President and directors can be dismissed if: there is an illness that means they are unable to carry out their duties; at their request; should they show proven and repeated performance which is unable to fulfil the Central Bank’s purposes; they receive a final and unappealable sentence for crime that prevents the exercise of public office; Administrative Links: there are no links to any ministries; the BC is an special nature authority, with technical, operational, administrative and financial independence; First appointments: The BC president and directors must be appointed within 90 days after the law comes into force. Accountability: The BC president must submit to the Federal Senate, in the first and second semesters of each year, the inflation and financial stability reports; the BC will also continue to release communications and minutes of monetary policy decisions, economic indicators and other information; the CMN will be responsible for setting the inflation goal.

It is important to note, however, that the measure has caused controversy among experts: there are those who see it as a major breakthrough in the economy but, on the other hand, there are those who consider it an obstacle to economic growth.

For Paulo Roberto Feldman³, professor at the Faculdade de Economia, Administração e Contabilidade (FEA) at the University of São Paulo (USP), there is concern regarding the institution’s regulatory function, as he understands that the measure does not solve the issue caused by roles being switched around between those who make up the Central Bank and those who hold positions in the financial market.

The same expert warns that the perception of benefit may be distorted at times, with the inflation target at zero. This is because, for the country, some inflation may be necessary to combat unemployment and that that would have to come from the government. Zero inflation is not always beneficial for the population, he explains, but it will always be beneficial for financial institutions. And now, with BC independence and autonomous management, there may be, at some point, a conflict of interest between banks and the population’s macroeconomic need⁴.

On the other hand, Fernando Henrique Meirelles, former BC president during Lula’s government, and former ministry of finance at the time of Michel Temer’s government, on March 1, 2018, stated⁵: “the important thing is that the BC has the independence to fulfil its basic purpose, which is ensuring controlled inflation. There is the concern that inflation control gets exaggerated and hinders growth. But the target system already allows for this, and inflation must be pursued within that range, and this has then already addressed that concern.

In general, former BC presidents, such as Arminio Fraga, from FHC’s government, Alexandre Tombini, from Dilma Roussef’s government, and Ilan Goldfajn, from Michel Temer’s government, are optimistic about the implementation of this measure, expected for so many years, emphasizing again that Roberto Campos Neto, current president of BC as already mentioned above, also has good expectations in relation to LC 179/2021.

The BC independence model is nothing new and is being applied in other places in the world, such as England, Chile, Australia, Mexico, the United States and Japan⁶. In this regard, Carlos Thadeu de Freitas Gomes, former director of BC (1986-1988) and Petrobras (1990-1992), states that: “In Brazil, the BC should have a model similar to the United States Fed, the Central Bank of Japan or, even, the European Central Bank, considered the most independent in the world. In all of them, there are terms of office that demand discipline and respect for economic and monetary rules, which cannot have political influence. This step is of great importance. Especially in changes of government, directors should not be influenced.”⁷

Finally, it should be noted that the approved text of the new Law expressly states that, despite the independence of the BC, its directors will be appointed by the President of the Republic, so that, indirectly, the election of the country’s highest authority will directly influence the election of the BC board of directors. However, given that fulfillment of the terms of office will alternate, and will not coincide with the President of the Republic’s term of office, the above warning is reinforced, that the directors, in changes of government, should not be influenced, under penalty of still being pressured by political parties, which goes against the main idea of LC 179/2021.