Central bank independence

a tale of two countries

Beginning of 2025 there was a post on LinkedIn by a friend, Donald, asking what would be the hot topics of 2025. Me being me said “central bank independence”. And I said that not only because Donald Trump had just been elected the new American president, but mostly because of noises coming from the Brazilian president, Lula. Well, 2025 has been rich on the topic. Let me focus on Brazil and South Africa.

In South Africa there were a number of conversations about having a new inflation target. The conversation was mostly spearheaded and sponsored by the South African Reserve Bank. Motivation for a lower target abounded but the most popular one was that with a lower target South Africa would grow faster (to be more precise, SA would start growing). I wrote many times that low inflation doesn’t automatically cause higher growth. Yes, I confess, I am a growth economist and for me institutions rule and there were no institutional improvement in South Africa (which includes microeconomic reforms), therefore I couldn’t see much growth emanating from a new target.

In addition to having Lucas, Kydland and Prescott, and Rogoff in mind, the institutional problem I touched on many times was simple: the SARB implements the target that is set by the National Treasury, which for most of the year was quiet. At some point the NT issued a rebuke, but that came too late. By the time of the rebuke, the SARB was well entrenched in that ‘territory’ of a lower target and it stood its ground effectively. The interloper, the NT, had to concede. And so it did. The conversation was populated mostly by academics funded by the SARB and by well-connected financial sector actors. No matter what the constitution says, the ‘common knowledge’ amongst those actors was that the SARB had the right to influence the debate in the way they did (game theorists out there will know what I am talking about here).

Turning to Brazil, Lula came into power in 2023 complaining about the Brazilian Central Bank, specifically about the interest rates (monetary policy). The volume of his noise reduced a bit when the new BCB president, Galipolo, was appointed, by Lula himself. All good until something happened. The Bank Master was about to collapse and the BCB had to intervene (financial regulation). Master was ‘liquidated’ by the BCB. No bailout in the horizon. In addition, the BCB identified fraud and had to bring the Federal Police (PF) into the equation. Daniel Vorcaro, the owner of Bank Master, was caught by the PF in his private jet trying to fly to Malta.

Institutions rule. So far so good. Until it wasn’t. The Supreme Court (STF) decided that they wanted to be part of the whole affair and started putting its fingers in the process. The STF decided to free Vorcaro from prison and also that they, the STF, would have access to all information gathered by the BCB wrt Bank Master. Moreover, the court that oversees the government’s accounts, the Tribunal de Contas da Uniao (TCU) was brought into the equation as well and is, as I write this piece, inspecting the whole process conducted by the BCB wrt Bank Master. They, the TCU, have even transpired that the whole process wrt Master might be reverted. The powerful National Federation of Banks (Febraban) issued a note giving support to the BCB.

I will abstract from the behind the scenes being reported by the local media, who knows who, who flies with whom to watch the Libertadores Cup final in Lima, whose wife works for Vorcaro, which influencer got money to discredit the BCB, etc. I am interested in the macro and political economics of the whole affair.

Institutionally speaking the BCB is part of the National Monetary Council (CMN) which consists of the BCB itself plus the Finance (Fernando Haddad, who presides the council) and National Planning (Simone Tebet) Ministries. What has been their reaction? Total silence so far. And Lula? Silence.

Although inflation has been under control since 1994, Brazil had a long history of high inflation. The BCB has invested heavily in technical capacity and important institutional steps have been taken to make it more independent, transparent and accountable (the CMN is monitored by the National Congress). Some legalists see inconsistencies with the way that the Supreme Court and TCU have been handling the issue, without any participation of the CMN and National Congress. I tend to agree, but if the Supreme Court and TCU are doing what they are doing is because they can.

There is no need to distill the importance of having an independent central bank here, I would be preaching to the converted. The South African case illustrates a central bank that has gone rogue, which disregards the rules of the game and which is insulated by the market. The Brazilian case illustrates a central bank that is about to be captured. In both cases the institutional framework has to be improved.

What I think matters little. What matters is that rules have to be designed in order to make sure that the SARB is well-staffed, efficient, transparent and accountable. Otherwise rules will be bent by elites. What matters is that rules have to be designed in order to make sure that the BCB is well protected from rent seeking actors. Otherwise they will be bent. Institutions are not supposed to be static, they are supposed to be adaptable and dynamic. Technologies change, societies change, values change, norms change, rent seekers change, institutions must change as well. “The times they are a-changing”. In all, hopefully society is to gain.