Latin America Is an Unlikely Bulwark Against Attacks on Central Bank Autonomy

(Bloomberg) -- As Donald Trump reignites the global debate about central bank independence with his attacks on the Federal Reserve, Latin America of all places is leaning the other way.

After decades of rampant inflation, the continent’s governments have largely resisted involvement in monetary policy. While Venezuela is a notable exception, right-wing governments in Brazil and Argentina are fortifying central bank autonomy. Even Mexico’s new populist government has yet to succumb to the temptation to interfere.

“Central banks are, in a way, guardians of the macro credibility,” said Alejandro Cuadrado, global head of FX at Banco Bilbao Vizcaya in New York. “In the case of the major Latin American economies, I think that is well understood.”

The Latin American trend stands in contrast to emerging markets from Turkey to India, where central banks have been increasingly subject to pressure from their leaders and governments to change course. Turkish President Recep Tayyip Erdogan has dismissed the country’s central bank governor, while India brought in a more dovish bank chief when his predecessor resigned after a row with the prime minister.

Past Trauma

Latin America has been plagued by hyper-inflation, from Chile in the 1970s to Brazil in the 1990s and Argentina more recently.

“Because of that trauma, people accept the fact that low inflation is a good thing and you can only guarantee low inflation by having a central bank that is independent or autonomous,” said Monica de Bolle, director of Latin America studies at Johns Hopkins University’s SAIS school. “That makes Latin America different than anywhere else.”

Chile granted autonomy to its monetary authority in 1989, and started inflation targeting a year later. It has never looked back. Inflation slowed in the next decade and has since remained relatively low and stable.

Slow Learners

Other countries were slower to learn.

The autonomy of Brazil’s central bank was compromised during former President Dilma Rousseff’s presidency, which produced a period of high inflation, high unemployment, and recession, said Alberto Ramos, chief Latin America economist at Goldman Sachs in New York. Now it’s moving in the opposite direction, with the government increasingly likely to enshrine formal independence for the monetary authority.

Argentina was an even more obvious case. President Cristina Fernandez de Kirchner fired the central bank governor for refusing to transfer billions of dollars of reserves to the government for debt payments. Her successor, Mauricio Macri, raised inflation targets halfway through his term, sparking speculation he was doing so to pave the way for rate cuts; the change was cited as the start of Argentina’s devastating confidence crisis.

Argentina has since changed tack, allowing the central bank to impose one of the toughest monetary policies in emerging markets in order to defend the peso.

Then to Now

Even Mexico’s left-wing fireband, President Andres Manuel Lopez Obrador, has repeatedly said his administration won’t interfere in monetary policy. Still, this week’s resignation of the finance minister has fueled concern it may just be a matter of time before he starts to push for lower rates amid persistently weak growth.

Lopez Obrador “has undermined the independence of pretty much every other institution thus far,” Edwin Gutierrez, a money manager at Aberdeen Asset Management in London, wrote in an email. The central bank “will be the last to fall.”

Elsewhere in Latin America, orthodoxy reins.

“Most politicians here know now that were they to slip back into higher inflation, approval ratings would go down and they would probably not be reelected,” former Brazilian central bank chief Arminio Fraga said in an interview in Rio de Janeiro. “These lessons are never learned forever, but it seems to be sticking.”

--With assistance from Philip Sanders and Carolina Millan.

To contact the reporters on this story: Sydney Maki in New York at smaki8@bloomberg.net;David Biller in Rio de Janeiro at dbiller1@bloomberg.net;Ben Bartenstein in New York at bbartenstei3@bloomberg.net

To contact the editors responsible for this story: Julia Leite at jleite3@bloomberg.net, Philip Sanders

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