The SELIC rate will remain at 6.5% for the time being, but a scenario of monetary easing in the second half of the year is starting to take shape. The GDP growth projections for 2019, which were around 2.5%, are being revised downward, and even with approval of a robust pension reform (in the best case in the second half of the year) there are no credible forecasts of an increase in gross fixed capital formation sufficient to hasten the closing of the negative GDP gap. Additionally, there is no way to count on an impetus from fiscal policy, which will remain contractionary, or from higher exports. The Central Bank is unlikely to start a new round of monetary stimulus before approval of the pension reform, but against a backdrop of weak recovery of economic activity, there will be no reasons not to make that decision in the second half of the year depending on the reform proceedings in Congress.
The slow cyclical recovery is not a consequence of a lack of monetary stimuli. In Graph 1 we show four estimates of the neutral real interest rate perceived by economic agents: the implicit rate based on the Focus survey; the implicit rate of the Central Bank’s reaction curve; the implicit rate according to the yield curve structure; and the rate mechanically estimated by applying a HP filter to the one-year real interest rate. Details of these estimation methods are described in the Special Report of October 24, 2016 (“What Will Be the Size of the Easing Cycle?”). In the financial market’s perception, the neutral rate should be around 4% a year, which is higher than the market real rate in transactions for one year, currently a smidgen below 3%.
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