Weak Activity, Falling Inflation and Strong Monetary Easing

BRAZIL ECONOMICS - Report 15 May 2017 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

For several months we have been presenting arguments that based on the severity of the recession and the absence of factors to hasten reduction of the negative GDP gap, the correct reaction of the Central Bank is to cut the interest rate more aggressively. The data published in the past two weeks strengthen our projection that the SELIC rate will reach 8% at the end of 2018. We don’t intend to play the “betting game” about whether the cut will be 1% or 1.25% at the next COPOM meeting. We only want to reiterate that in light of the recent numbers on inflation and activity (which have had reflections on the yield curve), and the signs of lower political risk regarding approval of the social security reform, that forecast is even stronger.

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