Credit, economic activity and monetary policy

BRAZIL ECONOMICS - Report 02 Jul 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The economic recovery will be slower than foreseen before the truckers’ strike in May, both because of its direct effects (temporary paralysis of transport and part of manufacturing activity) and indirect ones (worsening of sentiment and financial conditions). This, along with anchored inflation expectations, will keep the SELIC rate constant until the end of the year. The worse external picture combined with the inability of the current government to make any progress on the reforms necessary to reverse the fiscal situation is exerting pressure on the exchange rate. The Central Bank will continue to intervene in the currency market aiming to smooth out the movements, but there is no target for the exchange rate. We project the SELIC rate constant for an extended period (beyond 2018) which is in line with the information contained in the Central Bank’s projections. The future monetary policy steps remain highly dependent on the reforms, especially in the fiscal field.

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