A larger dose of monetary stimulus

BRAZIL ECONOMICS - Report 23 Sep 2019 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

We are reducing our SELIC rate forecast to 4.5% a year at the end of 2019. To what do we owe such change? The conditional projections shown in the Central Bank’s most recent communiqué, indicating that if the exchange rate remains stable at R$4.05/US$ and the SELIC falls to 5%, inflation would end 2020 at 3.8%, 20 basis points below the target. In other words, the indication given by the Central Bank itself is that there is room for the interest rate to dip below 5% by the end of the year. How far might this decline go? An estimate based on traditional models (using data that obviously reflect past situations), with the interest rate at 4.5%, is that inflation next year would be near the target. However, due to a series of huge structural changes all these models have systematically overestimated the inflation rate, indicating that although by the end of 2019 the SELIC rate will reach 4.5% per year, by the end of the cycle it may be below this level.

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