Central Bank autonomy: a step in the right direction

On February 10, the Chamber of Deputies approved the project that grants autonomy to the Central Bank. The deputies approved the text by 339 votes to 114. Proposals that aimed to change the original text were analyzed, but all were rejected by parliamentarians. The text has also been approved by the Senate and should now receive final approval from the President of the Republic.

Central Bank autonomy has been debated in Congress since 1991, but governments have since shown little willingness to give up the bank's political control. Suffice it to say that not long ago, despite inflation rising substantially, the basic interest rate (SELIC) was maintained at the same level by the Government so that there was no interference in the electoral cycle.

From now on, the president will indicate the names, which will be heard by the Senate and, if approved, will assume the positions in the direction of the bank. The nominees, once approved by the Senate, will assume their functions on the first business day of the third year of the President of the Republic's term of office.

The terms of president and directors will not coincide with the term of president of the Republic. In this way, the entire management of the bank will be disconnected from any ministry, including the Ministry of Economy.

In exchange for this autonomy, the BC president must submit, every six months, reports of inflation and financial stability to the Senate, explaining the decisions taken.

Among countless other objectives of the proposal, the main one is for the Central Bank to be more technical and focused on combating inflation. This will be due to the impossibility of the institution's board of directors being dismissed based on political criteria by the President of the Republic, in other words, the chief executive is renouncing a political control that dictated the course of the national economy for many years.

The autonomy of the Central Bank puts Brazil in harmony with the group of countries that already have an autonomous Central Bank, such as South Africa, Chile, United States, Japan, Israel, United Kingdom, Switzerland and Sweden.

The degree of autonomy of central banks varies from country to country, as well as the focus of the agency's activities. The American Central Bank (FED), for example, focuses on the economic recovery and the maintenance of employment levels, while in Brazil, despite having gained autonomy, the central bank will continue to act on price stability and on fighting inflation.

Despite representing a change in the right direction, the measure can and should move towards an even more decentralized arrangement in the future. In a more optimistic scenario, the Central Bank would become not only autonomous, but also independent, in the autonomous conduct of national monetary policy.

An even more daring arrangement, but so far incompatible with the Brazilian institutional arrangement, would be the extinction of the Central Bank and the end of the forced course (existence of a currency put underway in the economy by law). In this arrangement, without the participation of political power in the economy, the creation and circulation of currency would be absolutely decentralized. The idea is bold and until recently almost impossible to be conceived, but with the advent of cryptocurrencies it is possible that proposals of this nature will emerge.

Although the autonomy of the Central Bank does not represent its independence, the measure is an advance in the right direction. In practical terms, the formal separation from the Central Bank of the Executive Branch signals to the market that political interference will be less.

In the medium term, this may mean lower interest rates and an increase in the credit supply for the consumer.

Allan Augusto Gallo Antonio, holds a degree in Law and is currently following a Master's in Economics and Markets. He also works as the operations officer at the Mackenzie Center for Economic Freedom