The inflation report and the start of monetary easing

BRAZIL ECONOMICS - Report 01 Jul 2019 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

​Neither the minutes of the last COPOM meeting nor the latest Inflation Report is explicit about the start of monetary easing. This is understandable, since the Central Bank has an obligation to proceed cautiously, and the two documents call attention to the risk of frustration regarding approval of the reforms (especially the pension reform). However, the Bank projects growth this year of only 0.8% (the same as population growth, keeping per capita income 9% below the level before the start of the current economic cycle), and if the SELIC rate is kept stable at 6.5%, it projects inflation below the target in 2020. Even though monetary policy alone cannot “resolve” the present economic doldrums, the Bank has to consider the risk of aggravating the situation if it chooses to remain in the “comfort zone”, pursuing inflation below the target next year. The options are even narrower if it ignores the risk of committing a “type 2 error”, by failing to provide the necessary (but alone insufficient) monetary stimulus, and then discovering (without much surprise) that the pension reform was approved.

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