Market Real Interest Rate and Neutral Real Interest Rate

BRAZIL ECONOMICS - Report 18 Sep 2017 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

In its recent communication, the Central Bank left no margin for doubts: the ex-ante real interest rate is below the neutral real interest rate. Given the distance between actual and potential GDP – legacy of the severe recession that is just ending – monetary policy had to strongly stimulate the economy. However, barring a surprise from a fast and steep drop of the neutral interest rate, at some moment that monetary stimulus will have to be removed, meaning a higher SELIC rate. While this moment is not yet in the horizon, it will certainly arrive at some point in the future.

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