Henrique Meirelles: The Inflation Tamer

Running Brazil's Central Bank used to be about spinning explanations for one of history's worst cases of hyperinflation and some of the highest interest rates. That was then. Today, Latin America's largest economy has the lowest inflation of any emerging market, and it is one of the only countries worldwide where price rises haven't surpassed official targets. The credit belongs largely to Henrique Meirelles, a lonely hawk in the dovish world of money minders. The former BankBoston executive talked with NEWSWEEK'S Mac Margolis. Excerpts:

MARGOLIS: Brazil recently was promoted to investment grade by two major ratings agencies. What did the trick?
MEIRELLES: The country has reduced sovereign debt in terms of its share of gross domestic product, and the Central Bank has built up $200 billion in international reserves. Brazil is also showing it can grow, but with stable inflation.

Brazilian inflation is substantially lower than in other emerging markets. Why is that?
From the beginning we adopted a very severe disinflation program, so inflationary expectations were under control before the recent cycle of commodity price increases got underway. Since the first quarter [of 2008], the Brazilian Central Bank also made it clear that it wouldn't hesitate to tighten monetary policy if necessary.

Are raising national interest rates still effective in the middle of a global inflation spike?
Definitely. It's more important than ever to have inflationary expectations anchored, especially in the middle of an external price shock like the one we are experiencing now. There's no doubt that central banks around the world have eased their inflation targets to accommodate a first round of rising energy costs and commodity prices. But they have to take measures to stop price increases from spreading throughout the economy. And the basic instrument to do that is raising interest rates.

And yet you are constantly being taken to task for the Central Bank ' s orthodox, tight money policies, often by high-ranking officials in government.
Yes, but less so these days. Often during those [early] times, when I was in a restaurant, boarding a plane or walking on the sidewalk in Rio, people would come up to me and say, "Hey, why are interest rates in Brazil so high?" Today, it's completely different. People come to me and say, "Thank you for keeping inflation on target. Thank you for taking care of the future of our country."

Why did you take this job in the first place, knowing that you were going to be working for the head of the party which was constitutionally opposed to exactly the orthodox policies you ' ve implemented?
President Lula told me at the beginning he was prepared to extend operational independence to the Central Bank. And that's exactly what's happened.