Brazil’s Unpredictable Central Banker Tombini Confounds Critics
No central banker in the world’s top 10 economies has surprised analysts as frequently as Brazil’s Alexandre Tombini.
Since taking office 15 months ago, Tombini set interest rates lower than economists expected in three out of 10 policy meetings, including an August reduction that all 62 analysts surveyed by Bloomberg failed to anticipate. Russia’s central bank, the second most unpredictable, defied economists in three out of 14 rate decisions in the same period.
So far, Tombini has been vindicated. Inflation in Brazil, at 5.24 percent in March, is easing at a pace faster than analysts forecast. While investors have speculated that Tombini may be yielding to political pressure to lower rates, his gloomy assessment of the world economy and risk-taking may prove correct, according to Citigroup Inc.’s Dirk Willer. Tombini will cut the benchmark rate by three-quarters of a point to 9 percent tomorrow, according to a Bloomberg survey of 55 analysts.
“The central bank took a gamble and got it right,” Willer, head of Latin American local markets strategy at Citigroup, said in a telephone interview from New York. “It’s still open to debate whether the bank should take gambles in the first place.”
Tombini, a University of Illinois-trained economist, has used speeches to reiterate his commitment to inflation targeting, a system he helped introduce in Brazil in 1999 as head of the bank’s research department. In public statements, policy makers said they began cutting rates before economists expected because they accurately forecast in August that a global slowdown caused by the European debt crisis would ease inflationary pressures.
“The central bank isn’t in the business of surprising markets,” Tombini, 48, said in an interview last month, after the bank accelerated the pace of monetary easing and took the benchmark Selic rate to 9.75 percent. “Its business is keeping inflation under control.”
Pombini Tombini’s decision to cut Brazil’s rates in August, then the highest within the Group of 20 richest nations, set the pace for other central bankers. Europe, the U.S., Indonesia, Russia and Australia all followed Brazil in a round of global monetary easing that included rate reductions and fixed-income asset purchases. The Federal Reserve said it plans to keep interest rates near zero until late 2014.
All the same, back in Brazil Tombini’s moves earned him the nickname “Pombini,” a play on the Portuguese word for dove, the widely used symbol to describe central bankers with optimistic views of inflation.
Brazil’s inflation is the sixth highest within the G-20 and has been above the nation’s 4.5 percent target for 19 months. Consumer prices rose 6.5 percent in 2011, the upper limit of a tolerance range around the inflation goal.
‘Bold’ As Tombini anticipated, price pressures have eased as a result of weaker global and domestic demand. Consumer prices in March rose at half the pace of the previous month, lowering the annual inflation rate by 2.07 percentage points from a six-year- high of 7.31 percent in September. The slowdown had been predicted by Tombini in an Aug. 10 speech, when he said the inflation rate would drop two percentage points by April.
Before Tombini’s surprise cut in August, a weekly central bank survey of economists who cover Brazil showed they expected economic growth of 3.8 percent in 2011. Instead, Brazil contracted in the third quarter and wound up growing 2.7 percent in the year, the second-worst rate since 2003 and less than Germany’s 3 percent.
“The central bank may have been bold, but it wasn’t a bet, that was its outlook,” Luiz Fernando Figueiredo, former central bank board member and co-founder of Maua Investimento LTDA, said in a phone interview from Sao Paulo. “People are now coming around to its view, even if begrudgingly.”
Communication Glitches While Tombini’s predictions are proving accurate, his vision wasn’t clear to most economists and traders. He first surprised analysts last April with a decision to slow the pace of interest-rate increases to a quarter point after raising rates by half a point in the two previous meetings.
Then came the landmark rate cut in August. Coming after inflation accelerated in each of the previous 11 months, the move fueled speculation of political meddling. A day before the surprise decision President Dilma Rousseff vowed to take Brazil on a “new pathway” of lower borrowing costs “starting now.”