External Shock and Increased Risks

BRAZIL ECONOMICS - Report 21 Nov 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The depth of the recession and clear signs of waning inflation until recently indicated a growing probability that the Central Bank could increase the pace of lowering the interest rate. But with the election of Donald Trump, capital that was going to emerging countries has shifted back to the United States, and the real has sharply depreciated. Outside more immediate reactions, such as interventions in the foreign exchange market to reduce the volatility of the real and continuing a cautious monetary easing cycle, what would be most welcome at this moment would be deepening of the fiscal adjustment. The increase in confidence would reduce the risk perception, attracting capital (or reducing its outflow), helping to stabilize the movements of the real and facilitating the Central Bank’s job. But the political picture right now is unsettled, with many state governments facing budget crises, complicating the negotiations in Congress and introducing uncertainties.

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