The Start of Monetary Easing is Approaching

BRAZIL ECONOMICS - Report 05 Sep 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The communiqué from the last COPOM meeting left the door – formerly shut – ajar to starting a monetary easing cycle. The committee conditioned that decision on: a) limited persistence of the food price shock (read “lower food prices”); b) deceleration of the components of the IPCA more sensitive to monetary policy and activity (read “wages”); and c) reduced uncertainty about approval of the fiscal adjustment. Thus, progress on the fiscal reforms is a necessary condition for starting to cut the interest rate, and monetary loosening is one of the few weapons available to stimulate resumed growth, which is fundamental to generate primary fiscal surpluses and reduce the debt/GDP ratio. More than ever before, harmony between monetary and fiscal policy is necessary for the country to emerge from the current crisis and start growing again.

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