Brazil: New Central Bank Chief Gabriel Galipolo Nominated by the President

Brazil's President Luiz Inacio Lula da Silva has nominated Gabriel Galipolo as the new head of the Central Bank, thereby strengthening his influence over an institution he previously criticized for high interest rates. Galipolo is currently the Director of Monetary Policy at the bank and is set to replace Roberto Campos Neto, whose term ends in December. The appointment still requires Senate confirmation. Galipolo will take over a Central Bank grappling with rising inflation forecasts in Latin America's largest economy. Policymakers this month unanimously stated they would raise interest rates if necessary, marking a significant reversal from June's pause in the rate-cutting cycle. This stance contrasts with Lula's calls for lower borrowing costs to stimulate economic growth and improve living conditions. The appointment will further bolster Lula's influence over the bank's leadership, as he has already appointed four out of its nine board members. Following today's announcement, he will also have the opportunity to name two more directors and fill Galipolo's seat. Analysts surveyed by the Central Bank expect annual inflation to remain above the target of 3% until at least 2027. Consumer prices are under pressure from higher government spending, a weaker currency, a tight labor market, and stronger-than-expected economic activity. While most analysts anticipate that interest rates will remain stable at 10.5% through the end of 2024, traders and some economists are betting on hikes starting in September. Gabriel Galipolo advised Lula during his last presidential campaign and worked closely with Finance Minister Fernando Haddad as an undersecretary before joining the Central Bank's board in 2023. Unlike many of Lula's close associates, Galipolo is not a member of the Workers' Party and does not have a decades-long relationship with the president. Financial markets are concerned that the Central Bank under Galipolo's leadership might be less stringent in addressing inflation. In a contentious vote in May, Galipolo supported a larger rate cut even though inflation expectations were rising quickly. This decision triggered a negative reaction from investors and led to a decline in local assets. Since then, however, board members have unanimously voted and emphasized the need to control consumer price increases. Galipolo has signaled that he would not intervene in the currency without full board support. In recent speeches, he stressed that the bank should not cause additional market volatility and that rate hikes are on the table to bring inflation back to target. The future of monetary policy will remain politicized under his leadership. Traders will closely monitor Galipolo's actions, particularly regarding interest rate decisions and their alignment with Lula's goals to boost the economy.