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Lula faces central bank challenge

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Since taking office in 2003, Brazil's president Luiz Inacio Lula da Silva has been the man to watch in Latin America, bringing the region's largest economy unprecedented stability and silencing fears that the former steel worker would be unable to handle the country's huge foreign debt. This year, though, Lula faces one of the biggest challenges to his pro-market credentials: the task of pushing an initiative through congress to give the central bank autonomy.

The issue has been controversial for years in Brazil. Although Lula has the IMF on his side and finance minister Antonio Palocci knows the move would create enormous confidence among investors, workers and industrialists say they will lose out if it means that interest rates rise.

Less political interference

Lula's supporters say an independent central bank would convince the markets that monetary policy decisions are not motivated by political goals and put an end to rumours that the government will fire bank officials if it does not like their decisions. Autonomy could reduce the size of interest rate increases needed to curb inflation, the government says. Economists argue that while Brazilian sovereign debt has a relatively low credit risk of 400 basis points over US treasuries, other countries in the region, such as Mexico and Peru, have lower spreads because their central banks are independent.

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