The Monetary Policy Dilemmas

BRAZIL ECONOMICS - Report 03 Aug 2015 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

Last week the COPOM ended the tightening cycle with one more hike of 50 basis points, taking the SELIC rate to 14.25%, where according to the communiqué it will remain “for a sufficiently prolonged period.” But how long might that be? On the one hand, the Central Bank wants to bring inflation down to the target, but on the other it recognizes that the current recession will also be prolonged and the recovery, when it comes, will be timid. The objective of bringing inflation to the target acts to delay the next easing cycle, while the cost of a longer and deeper recession acts to hasten it.

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