The labor market and the recovery pace

BRAZIL ECONOMICS - Report 05 Aug 2019 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

​The Central Bank resumed the monetary easing cycle, cutting the SELIC rate by 50 basis points, to 6.0%, at the last COPOM meeting. The Bank’s projection model indicates that the SELIC will be reduced at least once more by 50 points, and we expect further cuts bringing the SELIC rate to 5% at the end of the year. This is a correct decision, and there can be no reservation that with these interest rates, monetary policy will add some more stimulus to aggregate demand, mainly household consumption. However, due to the labor market dynamics that currently hold sway, that impulse will have limited effect. Besides the very slow decline of the unemployment rate, with high contingents of discouraged and underemployed workers, the creation of formal jobs is still very timid. Without the security provided by formal employment, the reaction of consumers to lower interest rates will also be timid, limiting the expansion of consumption. Furthermore, we do not believe the other component of aggregate demand – gross fixed capital formation – is primed to react to the stronger monetary stimulus.

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