Much ado about nothing

BRAZIL ECONOMICS - Report 21 May 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Until recently the low interest rates in the United States and other mature countries – and the other side of the same coin, the low risk aversion – were causing demand for the assets of emerging countries to climb, strengthening their currencies and reducing the quotations of their CDS. However, with the US in full employment and following an expansionary fiscal policy, the dollar had to appreciate, and last week this movement intensified. The movement of the dollar has been reflected in the relative depreciation of the real, a trend aggravated by the domestic risks: the unsustainable fiscal situation, with no pension reform in sight, and the great uncertainty about the policies of the next government. The growth of risks – external and internal – has raised the slope of the yield curve and weakened the real, prompting the Central Bank to react conservatively, ending the easing cycle with the SELIC rate at 6.5% a year. Anyone casting a discerning eye on the interest rates in the USA, the behavior of the dollar, and the accumulation of domestic risk should not have been surprised by this decision, but all the same the noise emanated from the markets was loud. But from the standpoint of economic conditions, this was “much ado about nothing”.

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