Positive effects of the lower risk

BRAZIL ECONOMICS - Report 12 Nov 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Might the Brazilian economy’s cyclical recovery accelerate at the start of the next administration? The current government has left a positive legacy of a low basic interest rate with inflation fluctuating around the target. With a still-wide negative GDP gap (unemployment rate of 12% and low utilization of installed capacity), the outlook is that the interest rate will remain low for an extended period. Thus, the only risk of higher inflation comes from a possible escalation of the risks, working to counteract demand for Brazilian assets and depreciating the real. The past few weeks have witnessed a more intense decline of Brazil’s sovereign risk and greater appreciation of its currency than in other emerging countries, revealing a “snapshot” that favors optimism regarding inflation and cyclical recovery. However, part of this movement derives from the expectation that the new government will make progress toward fiscal consolidation, the intensity of which is still unknown. This is the most important aspect to evaluate the next scenes of the “movie” that will debut in January in 2019.

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