Inflation Heading Toward the Target and Contraction of GDP in 2022

BRAZIL ECONOMICS - Report 20 Dec 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

In the minutes of the last COPOM meeting and in the most recent Inflation Report, the Central Bank left no doubts: monetary policy will remain in significantly restrictive territory for as long as it takes to bring inflation back to the target. However, its projections indicate GDP growth of 1% in 2022, a figure in line with the “market consensus”, while the Focus survey projects growth of 0.5%.

In this report we compare the degree of monetary restriction in 2015 with what is in store for 2022. In both cases, the peak inflation exceeded 10%, and the expected rate 12 months ahead rose above the upper limit of the target interval. However, we show that the unanchoring of expectations in 2015 was much worse than now, and we discuss the reasons for this. The consequence is that in 2022 the SELIC rate will have to be raised less than it was in 2015, when the one-year ex-ante real interest rate (the 360-day DI deflated by inflation expected 12 months ahead) was kept higher for a longer period, causing a more intense contraction of GDP than will be the case in 2022.

However, before the “monetary restriction” achieves its full force, which will happen at the start of next year, there are already signs of slowing growth, and although with less intensity than in 2015, it will be hard to escape contraction of GDP in 2022.

Now read on...

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