How Intense will the Monetary Easing Cycle be?

BRAZIL ECONOMICS - Report 28 Nov 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

To gauge the intensity of the interest rate cut, the Central Bank will observe three sets of information, regarding: a) inflation and economic activity; b) approval of fiscal adjustment measures; and c) the effects of “external shocks” that alter the trend of the exchange rate. In the past 45 days it has become clearer that the recession is still getting worse, and that inflation has been declining faster. Together these mean that the window is open for more intense lowering of the SELIC rate. This forecast has not changed even in light of the depreciation of the real after the election of Donald Trump. Our prediction is that if the political crisis that started last weekend is absorbed, and the spending cap PEC (proposed constitutional amendment) is approved in its first run in the Senate, the Central Bank will change its tone in the communiqué from the next COPOM meeting, indicating larger cuts in the upcoming meetings.

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