Inflation: Nothing wrong with the Central Bank’s conduct

BRAZIL ECONOMICS - Report 23 Jul 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

When coincidentally with the truckers' strike we witnessed a more pronounced depreciation of the real and a steeper slope of the yield curve (including the short end, rates up to 1 year), there was no shortage of cries for an increase of the SELIC rate. If the Central Bank had done that, it would have committed a huge error. With the economy firmly in the doldrums – which may have been aggravated by the strike – and worsening financial conditions, the secondary effects of the weaker exchange rate dissipate quickly, and even the primary effects have trouble showing up in prices. The IPCA-15 data shows that the shock in June, when the monthly variation greatly exceeded all expectations, was almost all due to the supply paralysis, and the normalization has now put inflation back on the path of a gradual convergence to the target. So, with the country now back to “normal”, the Central Bank should keep the SELIC rate at 6.5%. But it is important to recall that over a longer horizon it will be necessary to take measures to prevent the latent fiscal crisis that has been looming over the country from turning real.

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