Monetary Policy: Serenity Signal

BRAZIL ECONOMICS - Report 01 Apr 2019 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

For some time now, the Central Bank has been warning of the risks of frustration of the reforms needed for fiscal consolidation and deterioration of the external scenario. Last week, the tension between the executive and legislative branches raised doubts about the magnitude of the pension reform that will be approved, and risks from the world economy also increased, mainly due to uncertainties involving the United Kingdom and Turkey. As could not otherwise have happened, the real (and the currencies of other emerging countries) weakened and there were shifts in the yield curve as well. In reaction to these turbulences, the Central Bank intervened in the foreign exchange market, aiming to reduce the volatility. It also reaffirmed that as of yet its projections do not suggest any alteration in the interest rate, so that the next monetary policy steps will depend on the progress made toward fiscal consolidation and the conditions associated with the international economy.

The IPCA-15 for March increased to 4.18% (from 3.73% in February). However, that increase was localized, derived only from the behavior of the prices of non-durables, especially food in natura, which rose by nearly 9% in the month’s IPCA-15, and the prices of services, which climbed by 3.8% (5.7% in the annualized monthly variation), against 3.5% in February. An important part of the increase of service prices was the higher air fares, reflecting the rise of the kerosene price. When removing air fares from services, the annualized monthly variation falls to 3.7% .

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