The End of the Adjustment Cycle and the Risk Ahead

BRAZIL ECONOMICS - Report 27 Sep 2022 by Affonso Pastore, Cristina Pinotti, Paula Magalhães and Diego Brandao

Last week, the Central Bank announced the end of the monetary tightening cycle, keeping the SELIC rate at 13.75%. In a scenario of high internal and external uncertainty, the COPOM opted for caution, but did not fail to warn about the effects of changes in the fiscal framework. Although the most likely scenario is that the interest rate will remain high for an extended period, with easing only starting in the second half of 2023, the Committee warned that the insistence on fiscal expansion precludes excluding that the next movement will be upward adjustment rather than a decrease of the SELIC rate.

This sign was reinforced by two dissident votes of Committee members, who preferred one more elevation of 25 basis points. There is a tug of war being waged between fiscal and monetary policy, whereby in the short run fiscal policy has been expanding economic activity, requiring the Central Bank to keep the interest rate high for a longer period, in pursuit of its only commitment, which is to guide inflation to the target, albeit only in 2024. When analyzing the perspectives as of 2023, we cannot fail to evaluate the global economy. In the last part of this report we examine the latest decision by the Fed, the situation and perspectives of the European and Chinese economies and the reflections of the global economy on Brazil going forward.

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