Monetary Tightening and Recession: What Does the Central Bank Want?

BRAZIL ECONOMICS - Report 08 Jun 2015 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

At its last meeting, the COPOM decided to raise the SELIC rate by 50 basis points, to 13.75% a year. This decision was widely expected by the market, so it caused no surprise. But there was also an expectation of a change in the tone of the communiqué, indicating that the end of the tightening cycle is nearing. After all, not only is the market real interest rate (based on 360-day swaps) near 7.5%, the highest level since 2008 (graph 1) and above any estimate of the neutral interest rate, the tightening has been acting to accentuate the recession. However, the communiqué's text remained unchanged, indicating that the SELIC rate can rise above 14%, the expected peak level according to the market consensus up to the meeting.

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