The Trump Effect

BRAZIL ECONOMICS - Report 14 Nov 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Although it is too soon for a precise evaluation, Donald Trump’s election in the United States has altered the scenario for emerging markets. The bet on greater fiscal stimulus and an increase in infrastructure investments has changed the forecasts regarding elevation of the interest rate and attraction of capital in the United States. The counterpart in emerging countries has been an exit of capital and weaker exchange rates, with Brazil being one of the most affected. To reduce the real’s volatility, the Central Bank intervened with currency swaps, and since it prefers to react to trends that are already consolidated instead of high-frequency movements, it will likely not change the course signaled for its next few monetary policy decisions. However, in light of a probable change in the level of the exchange rate, the probability has grown that the cycle of lowering the interest rate will be a bit less intense, reducing the degrees of freedom to use monetary policy to stimulate resumption of growth.

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