Inflation and Recession: The Central Bank Dilemma is Getting Worse

BRAZIL ECONOMICS - Report 23 Nov 2015 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The IPCA-15 for November rose 0.85%, taking the 12-month inflation rate to 10.28%. Part of this movement is due to administered prices (Graph 1), but along with the pressure exerted by service prices, the influence is also being felt of the weaker exchange rate, which has depreciated 40% since the start of the year. In addition, last week presented a sharp drop in the IBC-Br, along with a rise in the unemployment rate. As the recession deepens, the Central Bank’s dilemma grows. Under normal circumstances it would raise the interest rate, but this would aggravate the contraction of economic activity. The conclusion is that the most recent numbers will increase the Bank’s preference to “maintain the interest rate stable for a long period”, in hopes that the recession to reverse the unanchoring of expectations.

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