Inflation Reports – Points and Counterpoints

BRAZIL ECONOMICS - Report 28 Jun 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

Well-prepared Inflation Reports help to understand the progress of the economy by attaching the proper weights to the risks and forecasting the monetary policy movements. In the last Inflation Report (IR), the Central Bank sought to demonstrate that the elevation of the SELIC rate to a level compatible with the neutral rate (3%) is sufficient to bring inflation to the target by 2022 (the relevant horizon for monetary policy). Scenarios and projections are based on hypotheses that are subject to errors, requiring the results to be evaluated in light of the “balance of risks” regarding the existing uncertainties. The text of the IR identifies several relevant uncertainties: a) what is the “true” output gap? b) given that the major contributions (although not the only ones) to the recent increase of inflation have been the exchange rate and commodity prices, what will occur with the easing of these prices? c) what is the risk of fiscal unanchoring? d) how likely is a change in U.S. monetary policy? In this Report, we analyze the indications given in the IR and discuss counterpoints. At the end, we explain why a least-risk strategy would raise the SELIC rate at the end of 2021 slightly above the neutral level.

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