The Announcement of the Primary Surplus Target

BRAZIL ECONOMICS - Report 24 Feb 2014 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

The announcement of the primary surplus target was greeted by the market with an appreciation of the real and a downward shift of the entire yield curve – the short and long ends (Graph 1). Thus it was a positive reaction. In reality, the real was not the only emerging market currency to get stronger: there were similar movements by the Indian rupee, the Indonesian rupiah, the Turkish lira and the South African rand. It is also true that the fall of the short end of the curve occurred exactly when the finance minister declared that now “fiscal policy contributes to a less severe monetary policy,” leading the belief in a significantly higher probability that the SELIC rate will only be raised by 25 basis points at the next COPOM meeting, followed by a pause or another rise of just 25 points. However, there was also a substantial drop in the long end of the curve, where the interest rates had been rising steeply in line with growing doubts over the execution of economic policy. The first reactions of the market indicate the unease was partially allayed.

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