What Do Economists and the Yield Curve Have to Say About the SELIC Rate?
A broad consensus exists among economists about the future of monetary policy: the SELIC rate will fall to 7% in December (with an outside chance of one or two more cuts of 25 points) and stay at that level throughout 2018. But the picture painted by the yield curve is very different, “pricing in” a total increase of 150 points in 2018.
If the slope of the yield curve came from an “inflation premium”, this would implicitly mean assuming that the reaction of economic activity to the market real interest rate would be strong enough to quickly close the GDP gap. This would mean the Central Bank administered the “wrong dose”, one incompatible with keeping inflation on target. However, in our view the intensity of the economic recovery will fall far short of causing this result.
The alternative hypothesis – which is ours – is that the slope of the yield curve reflects a “fiscal/political premium”, coming from a combination of two main factors: the impossibility of guaranteeing a reasonable fiscal adjustment under the current government; and the uncertainty about the reformist or populist nature of the next government. The signs emitted by the slope of the yield curve, although not reflecting an error in executing monetary policy, cannot be disregarded.
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