End of the Easing Cycle with the SELIC Rate at 4.25%

BRAZIL ECONOMICS - Report 10 Feb 2020 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

With the economy still “depressed” and inflation below the target, why did the Central Bank decide to interrupt the cycle of lowering the SELIC rate? Before addressing this issue, we point out that in previous communiqués and minutes of COPOM meetings, the Bank insisted that the power of monetary policy has been getting stronger, principally due to the operation of a credit channel that previously did not exist. The brakes imposed on the BNDES (still under the previous government) has caused a resurgence of the capital market, and now with the decline of the neutral real interest rate, the real long-term rates are at historically low levels. These have added further monetary stimuli to the economy, namely long-term loans via the capital market. There is no way, in light of the brief operating history of this channel, to have a precise idea of its intensity, but it seems to be strong. Acting cautiously, the Central Bank opted to interrupt the easing cycle, to prevent the emergence of an inflation premium in the yield curve, which would reduce the effectiveness of the credit channel. However, with the economy marked by high idle capacity, the interest rates (at the long and short ends of the curve) should remain low for an extended period.

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