A New Central Bank and a New Monetary Policy

BRAZIL ECONOMICS - Report 25 Jul 2016 by Affonso Pastore, Cristina Pinotti, Caio Carbone and Marcelo Gazzano

In the inflation targeting regime, the nominal anchor is provided by inflation expectations, whose convergence to the target is assured by a combination of correct application of the monetary policy tool (the basic interest rate) and clear and transparent communication about the central bank’s projections and actions. To improve the effectiveness of the expectations channel, the new leaders of the Brazilian Central Bank chose a more extensive communiqué, with details based on their projections and assessment of the balance of risks (still unfavorable) and the reasons for the decision to keep the SELIC rate at 14.25% at the last COPOM meeting. The committee members explicitly recognized that their future actions depend both on approval of fiscal adjustment measures, a point about which uncertainties still exist, and a decline of inertia, whose occurrence depends on reestablishing the commitment to attain the central target in 2017.

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