By Marcela Ayres

BRASILIA (Reuters) – Brazil's Senate approved President Luiz Inacio Lula da Silva's nominee to lead the central bank, Gabriel Galipolo, who assured lawmakers of independence in decision-making.

Galipolo, deemed a heterodox economist with direct access to Lula, is the bank's current director of monetary policy. He aimed to alleviate market fears regarding potential leniency on inflation under presidential pressure.

During a Senate committee hearing, where his nomination for the role starting next year received unanimous approval, Galipolo reaffirmed his commitment to a 3% inflation target and acknowledged concerns about unanchored consumer price expectations.

> "It is up to the central bank to pursue this goal unequivocally by maintaining interest rates at a restrictive level as long as necessary to achieve it," he stated.

Later, Galipolo's nomination was confirmed by the full Senate with a vote of 66 to 5.

Galipolo noted Brazil's annual core inflation is comparable to more stable economies like the U.S., highlighting slower disinflation processes in Latin America's largest economy. He emphasized that the central bank must focus on a long-term horizon despite current data.

> "There is unanchoring (of inflation) in the relevant horizon that bothers us," he commented, referencing indicators of possible acceleration in interest rate hikes.

Galipolo and the rate-setting board Copom voted last month to initiate a tightening cycle, raising interest rates by 25 basis points to 10.75%. Before this, Lula remarked that policymakers needed to raise interest rates if necessary, signaling a shift from previous advocacy for lower borrowing costs.

As of mid-September, Brazil's annual inflation reached 4.12%, with private economists forecasting 4.38% for 2023, 3.97% for 2024, and 3.60% for 2026, all exceeding the official target.

MARKET SKEPTICISM

Galipolo's proximity to Lula, marked by a recent joint attendance in Mexico for President Claudia Sheinbaum's inauguration, has fostered skepticism among market participants. Previously, he served as the Finance Ministry's executive secretary under Lula and took over as monetary policy director in July 2023.

Initially, markets expressed concerns over Galipolo’s perceived lack of technical expertise and his stances on state intervention prioritizing social needs and broader central bank actions.

Despite initial resistance, he is set to succeed Governor Roberto Campos Neto, who was appointed by former President Jair Bolsonaro and criticized by Lula since taking office in January 2023.

Jefferson Laatus, chief strategist at the Laatus group, stated that market concerns would linger, with clarity expected in January during their first meeting together.

Regarding the financial autonomy of the central bank, a topic opposed by the Lula administration but favored by Campos Neto, Galipolo emphasized that current discussions represent a significant advancement.