By Walter Brandimarte
RIO DE JANEIRO Aug 23 Given his checkered
record so far, investors could be forgiven for thinking that
Brazil's quiet, bespectacled central bank chief Alexandre
Tombini is a pushover on inflation.
Since Tombini took the job in early 2011, annual inflation
has often hovered above 6 percent, dangerously close to the top
of the bank's target range. An unexpected spurt in prices this
year scared consumers, smothered the economy and contributed to
a wave of massive protests against President Dilma Rousseff's
The price instability, particularly sensitive in a country
still haunted by 2,500 percent hyperinflation in the 1990s, led
to whispers among investors that Tombini was too weak to get the
problem under control - or worse - that he allowed Rousseff to
pressure him into a 14-month campaign of rate cuts that many say
has backfired and undermined the bank's credibility.
But those who know Tombini well - a small group, given his
private nature - told Reuters they see the story differently.
They say the central bank chief is likely to be more hawkish
than most people think, and that he will do whatever he believes
necessary in the coming months to recover the confidence of
consumers and investors.
They say the recent setbacks resulted not from weakness, but
from a kind of betrayal by other parts of the government
including the finance ministry, which had tacitly agreed to
control spending so that Tombini could keep interest rates low.
Once Tombini realized the pact had been broken - too late,
some critics say - the 49-year-old career government technocrat
pivoted to the orthodox training he learned two decades ago at
the University of Illinois. Tombini started raising interest
rates at a rapid pace in April, even as the Brazilian economy
remained stuck in a two-year-long rut.
"I believe Tombini realized this: 'I have no help from the
fiscal sector, so I'll fulfill my mission (myself)'," said
Antonio Delfim Netto, a former finance minister in the 1960s and
70s who retains significant influence with Rousseff and senior
members of her economic team.
"I have no doubt he will raise interest rates as much as he
sees fit to bring inflation expectations back to 4.5 percent,"
the midpoint of the bank's price target range, Netto said.
That will be a big task. Consumer prices rose 6.27 percent
in the 12 months through July. Although economists on average
forecast the annual number will come down a bit to 5.74 percent
by the end of 2013, they expect little relief next year, with
inflation remaining at 5.8 percent.
Next week's rate-setting meeting will reveal a lot about
Tombini's strategy to try to regain the market's confidence.
Most analysts expect the central bank to raise its benchmark
Selic rate, now at 8.5 percent, by half a percentage point.
However, recent turmoil in Brazilian financial markets -
including a 5 percent selloff in the currency in the last week -
has fed some bets that Tombini and his board could be even more
aggressive, and raise the Selic by 75 basis points.
Tombini declined repeated requests to be interviewed for
this story. A spokesman for Finance Minister Guido Mantega
declined to comment as well.
THE BOOM IS OVER
Tombini's fortunes have to some extent mirrored Brazil's
abrupt fall from grace among global investors during the past
two and a half years.
When Rousseff nominated him to the post in 2010, Latin
America's biggest economy was in the midst of a boom that would
see it grow 7.5 percent that year, seemingly cementing its
reputation as a dynamo in the mold of India or China.
Tombini was seen as a discreet career technocrat at the
central bank who would be a safe guardian of Brazil's financial
stability, forged at great pains since the chaos of the 1990s.
While little was known about Tombini personally, apart from
the fact he - like almost all Brazilians - loves soccer, his
relative blandness was also seen as a plus in a country with a
long history of colorful, but ineffective public figures.
Even former President Fernando Henrique Cardoso, one of the
most prominent voices of Brazil's opposition, praised Rousseff's
choice and remembered Tombini had been instrumental in designing
an inflation-targeting plan in his own government in 1999. "I
remember he helped us with a lot of problems," Cardoso said at
However, it has been downhill ever since. The economy hasn't
grown above 3 percent since 2010, and is now expected to expand
just 2.2 percent this year and 2.5 percent in 2014.
Inflation expectations remain stubbornly above 5.5 percent
for the foreseeable future, according to the average forecasts
of private economists polled by the central bank.
"They did a very, very bad job since 2011 and they let
inflation expectations become un-anchored. I think this has had
a very negative impact on actual inflation," said Tony Volpon,
head of emerging markets research for Nomura Securities.
While the slow global economy has played a role in Brazil's
troubles, economists agree that many of its problems have been
self-inflicted. And perhaps none of the decisions have been
quite as controversial, or enshrouded in mystery, as the
management of interest rates in the past two years.
What is known for sure is this: Starting in August 2011,
Tombini unexpectedly began slashing the Selic, taking it from
12.50 percent to a record low of 7.25 percent by October, 2012.
The rate cutting was welcomed by most people in Brazil,
which despite the economic successes of the 2000s continued to
have some of the world's highest interest rates, due to the
legacy from the hyperinflationary years.
In speeches, Rousseff championed the lower Selic as one of
her main accomplishments, vowing it would never again return to
Where the story becomes murkier is just how the decision to
cut the Selic was made, and what guarantees Tombini received
from the government in return.
Many market analysts are convinced that Rousseff herself
ordered Tombini to cut the Selic to record lows. Rousseff, a
trained economist, has often relished making financial policy
decisions since becoming president, aides say. Brazil's central
bank does not enjoy formal independence, and Rousseff has the
power to replace its chief if she so desires.
However, Brazilian officials including Rousseff's spokesman,
Thomas Traumann, rigorously deny that the president ordered the
rate cuts. They say Tombini has de facto authority to set the
Selic as he sees fit.
Werner Baer, Tombini's economics professor at the University
of Illinois and one of the most respected foreign experts on
Brazil's economy, agrees with Netto's more nuanced narrative of
how the Selic was cut.
The story: That shortly after Tombini took the job, a pact
was made between the central bank and other branches of
government to work together to bring down Brazil's borrowing
costs to "civilized" levels.
As part of the deal, the finance ministry and other
departments would curb spending to lower the burden on monetary
policy, the government as a whole would push for reforms to
boost investment, and the central bank would cut interest rates.
Unfortunately, only the central bank has been able to
deliver its part of the bargain.
Scared by the magnitude of the economic slowdown, Finance
Minister Mantega unleashed a slew of tax breaks and cheap loans
to stimulate domestic consumption.
As a result, Brazil's primary surplus, or the
excess government revenue before debt payments, dropped to 2.0
percent of gross domestic product in the 12 months through June.
That is far less than the 2.71 percent recorded during the same
period a year ago, and also below a target of 2.3 percent for
Meanwhile, investment has remained stagnant at around 18
percent of GDP - one of the lowest ratios in Latin America, and
well behind the 46 percent seen in China.
The result has been severe bottlenecks in the supply of
goods and continued poor infrastructure, with pressure also
coming from government spending: a recipe for high inflation.
A source at the finance ministry argued it is unfair to
blame fiscal policy for the shortcomings of monetary policy.
While the person said he was unaware of any pact in 2011
between the finance ministry and central bank to lower interest
rates, he did say there was policy coordination to ensure rates
could come down, including a decision to freeze an additional 10
billion reais from the 2011 budget.
The source also said the deterioration in the primary
surplus in 2012 and 2013 resulted not from overspending, but a
series of tax breaks, "which have a positive impact on the
economy and inflation, besides making companies more
With so little help from other parts of the government,
University of Illinois' Baer said, "the only thing Tombini can
do now is to raise interest rates....
"He's done remarkably well," Baer said in an interview.
"He's very smart, very discreet, and he is in a very difficult
The Selic has already come up 125 basis points since April.
Economists expect a rate of 9.25 percent by the end of 2013,
although some such as Bradesco Asset Management and Bank of
Tokyo Mitsubishi bet it will reach 10 percent by year-end
Even some of the Brazilian government's harshest critics
seem to put Tombini in a category by himself, saying he seems
determined to get prices under control.
Nomura's Volpon, who regularly sends out scathing e-mails
about Brazil's policy mistakes, said: "I do see now the central
bank willing to take expectations seriously."
Volpon's main criticism against Tombini is that he took too
long to react to a clear deterioration in Brazil's fiscal
policies. "The fiscal pact was broken and the central bank kept
cutting rates. That was the mistake."
Marcelo Kfoury, who helped Tombini design the central bank's
inflation-targeting regime before becoming the head of the
economic research department of Citi Brazil, said his former
colleague will not hesitate to do what is needed to control
prices, keeping them within the target band.
"If there is a threat for inflation to breach the upper
limit, he is 100 percent focused on inflation," Kfoury said.