Inflation Trend and Risks Ahead

BRAZIL ECONOMICS - Report 26 Feb 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

At this point in time, the Central Bank is probably looking not only at 2018, but also 2019, when it will have to strive for convergence of the interest rate to the “neutral” level. The ideal situation would be for the government to make progress in the reforms – not only in the fiscal field, but mainly there – to reduce risks and allow the neutral interest rate to decline. Unfortunately, it appears that little progress toward fiscal consolidation will be possible this year, which should be explicitly considered when making monetary policy decisions. Nevertheless, inflation remains well below the lower bound of the target interval, and the probability of significant acceleration in the next several months is low. If one looks only at inflation (and the slow recovery of economic activity), with eyes fixed just on 2018, the path is open for one more cut of 25 basis points. But these are not the only factors considered by the Central Bank.

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