Changing in the external scenario: Are there any consequences for Brazil?

BRAZIL ECONOMICS - Report 07 May 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

With the American economy running at full employment (the jobless rate is below the NAIRU) and the government following an expansionary fiscal policy (reduction of the corporate income tax approved by Congress), the tendency is for the dollar to get stronger, not weaker as President Trump wants. Since the middle of 2017, the financial market has been adjusting to the expectation of higher interest rates in the US, and that movement intensified last month, causing the dollar to appreciate. This is one of the causes (though not the only one) for the depreciation of the real in the past few days. With Brazil’s yawning negative GDP gap, this does not pose any risk of inflation. Against a backdrop of at most occasional interventions aiming to reduce the volatility of the real, without any commitment to an exchange rate target, and of the slow recovery of economic activity, keeping inflation near the lower bound of the target interval, we see no reasons for the Central Bank to alter its indicated monetary policy course.

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