The monetary policy bearings

BRAZIL ECONOMICS - Report 13 Aug 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The final days of last week were marked by strong depreciation of the Turkish lira, followed by intense movements of the South African rand and Argentinian peso. Movements like these tend to spread to other emerging country currencies, and will likely affect the real in particular due to the uncertainties over the fiscal adjustment under the next government. The external scenario was already volatile when the minutes of the last COPOM meeting were published, in which the Central Bank reiterated (correctly, in our interpretation) its preference not to give indications about the next monetary policy steps. At the next meeting – the last one before the elections – the SELIC rate will almost surely be maintained. The result of the elections will be a watershed, and the Central Bank should not “bet” on the outcome, by reacting to an unpredictable event. In this report, we discuss the monetary policy scenarios for the post-election period, in particular the scenario of the election of a candidate with strong political support for a reform agenda.

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