Brazil’s central bank, a bulwark against inflation and nutty government policies, has suffered its first crisis under the new left wing government of Luiz Inácio Lula da Silva. Ilan Goldfajn has quit as head of research, an important job in a central bank with an inflation-targeting monetary policy. His departure scares people who worry that Lula is pressuring the semi-independent central bank into cutting interest rates despite very high inflation.

Goldfajn quit after Vice President José Alencar (a textile magnate before entering politics) criticized the central bank for keeping interest rates at 26.5% a year. The bank’s president Henrique Meirelles (a former international banker) said the sensible thing: the central bank must only be judged by its results and nothing else. Meirelles is under immense pressure from all Brazilians to get inflation and interest rates down so the country can resume growth. Inflation, now at nearly 19%, is at its highest level in years. Lower inflation means lower interest rates and more growth. The trouble is, this takes time and requires rational government economic policies too. But Brazilian politicians, like their brethren everywhere, want immediate results. Fortunately, Lula (former leftist agitator and union leader) slapped Alencar down. Anyway, Goldfajn and a few other central bank directors have said they would leave once the new government had settled in.

So, the panic is over for now but Brazil still has to achieve sustainable interest and growth rates. The central bank is an appendage of the finance ministry. The government says it wants to pass a law giving the central bank real independence. That would further boost confidence in Brazil and help growth. Sadly, central bank independence has its limits. A central bank can’t stop a government determined to follow ruinous policies or borrow insanely. Argentina’s central bank had impressive legal safeguards but in 2001 it became very clear how little they meant when it tried to stand up to a government bent on debasing the currency.