The New Government and the Interest Rate Decline

BRAZIL ECONOMICS - Report 09 May 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Backed by the changes in the economic policy field, the most important of which is the major shift in fiscal policy, the Central Bank under the coming Temer government will likely start an easing cycle. Although inflation is still very high, important forces are at work to reduce it, mainly: the end of the adjustment of administered prices; the recession and resulting sharp rise in unemployment; and the reduced pressures on the exchange rate. Although the challenge is huge, expectations are that the new economic team will be able to start an agenda of reforms that can reverse the rising trajectory of the debt/GDP ratio. Progress in this agenda is crucial to restore credibility and facilitate the Central Bank’s task.

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