Monetary Policy and Its Limits

BRAZIL ECONOMICS - Report 26 Jan 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

At its last meeting, the COPOM deleted the forward guidance – the commitment to keep the SELIC rate at 2% for an extended period – meaning that as soon as deemed necessary, the monetary authorities will proceed with monetary normalization. The current directors of the Central Bank have given strong indications that their only objective is to produce convergence of inflation to the target “over the horizon that is relevant to monetary policy.” As things stand now, this includes 2022. Since the lags of the reactions to monetary policy are relatively long, the normalization will likely start sometime in the first half of 2021. In successive pronouncements, directors have been expressing discomfort with inflation above the target (albeit by a narrow margin), and have repeatedly stated that the intensity of the reaction depends on the quality of the fiscal anchor, which affects the results of monetary policy.

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