Lula’s attacks threaten more political influence at BCB

Brazil’s President Lula has renewed his attacks on the central bank and high interest rates in recent weeks, raising fears that there could be more political influence on monetary policy from next year after he has appointed three new Copom members. While that could result in a quicker reduction in interest rates, it would put further pressure on the real. And the experience from Brazil in the early 2010s and elsewhere in the emerging world suggests that political pressure on the central bank causes inflation to drift up and, ultimately, requires a long period of high(er) real interest rates further down the line.