Brazil central bank chief resists using new QE powers

Brazil’s central bank chief says that newly granted quantitative easing powers are intended more for “market stabilisation and not an alternative form of monetary policy”.

“We still think we have monetary space on the traditional policy. If you start using unconventional policy before you exhaust the conventional policy, you create noise that makes the central bank lose credibility,” Roberto Campos Neto, the president of Banco Central do Brasil, or BCB, told the Financial Times.

Last month Congress granted the BCB crisis-fighting powers to buy a range of private and public assets, including government and corporate bonds, to ensure liquidity and shore up Latin America’s largest economy, which is forecast to shrink more than 6 per cent this year.

Despite this, analysts say the central bank has not yet used its new powers, which will expire at the end of this year.

“You have a box full of tools and you need to understand what to prioritise. As of now we think we have a very good box of tools, but we are seeing this [the QE powers] more to stabilise markets than an alternative way of monetary policy,” said the 50-year-old central banker.

His comments were greeted with relief by some economists, who have fretted over the inflationary effects of quantitative easing and the monetisation of debt on already heavily-indebted nations, such as Brazil.

Under Mr Campos Neto, the central bank has slashed Brazil’s benchmark Selic interest rate to a historic low of 3 per cent and is expected to cut by a further 75 basis points this month.

The BCB president said there was now greater clarity on the extent of the damage likely to be wrought by the coronavirus pandemic and that “uncertainty regarding the extreme cases has diminished”.

The bank in March launched a $300bn financial liquidity package — equivalent to 16.7 per cent of the country’s gross domestic product — to try to mitigate the efforts of the broad economic shutdown caused by the coronavirus pandemic.

“I don’t think any other country has done anything close to that,” Mr Campos Neto said.

Officials, however, quickly faced criticism that the funds were not reaching small and medium-sized enterprises with commercial banks hesitant to loan for fear of defaults.

The central bank president acknowledged the problem, saying: “If you look at the bigger companies, there is more money going to them than medium companies and there is more money going to medium companies than small ones.”

To address the situation, Mr Campos Neto said the bank would roll out “two or three programmes” to help SMEs in the coming weeks.

“For small companies . . . we were thinking of either using credit card machines to reach small merchants or doing it through databases that are already in the government,” he added.

However, Mr Campos Neto cautioned that supply would never be able to match demand and that Brazil’s tight fiscal situation had limited the availability of grants and loans from the country’s treasury.

“In Brazil we are more limited in our fiscal lot, so we are trying to do programmes in a wiser way.”

Alongside Paulo Guedes, the finance minister, Mr Campos Neto is a central proponent of Brazil’s economic reform agenda — a sweeping programme of deregulations, privatisations and fiscal rectitude, which is aimed at restoring investors’ trust in the economy.

The agenda made strides last year with the passage of a landmark pensions reform bill. Since then, however, it has become overshadowed by the coronavirus crisis as well as bitter political infighting involving Congress and President Jair Bolsonaro.

Mr Campos Neto said that structural reforms, including granting autonomy to the central bank and reforming the country’s byzantine tax system, were crucial if the country was going to grow again.

“Now the real question is what will be the shape of the recovery,” he said. “The more reforms we do the better will be the shape. That is the message I am trying to pass to everyone in Brasília.”