When, and under what conditions, can the SELIC rate be reduced?

BRAZIL ECONOMICS - Report 11 Mar 2019 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

In face of the an extremely slow cyclical recovery and inflation below the target, soon enough we will hear clamors for a new monetary easing cycle. Curiously, there is clear evidence that the current SELIC rate is already providing a good dose of monetary stimulus. As we showed in our report of February 11, 2019 (“Monetary Easing in the Second Half of 2019?”), the market real interest rate is now below the neutral real rate. In other words, monetary policy has already been doing its part. By creating conditions to achieve fiscal consolidation, the approval of the pension reform package will give the Central Bank the fundamental support to carry on further monetary stimuli, and a monetary authority that is aware of the limitations of its instruments cannot ignore the importance of such support. Indeed, a responsible monetary authority needs a good deal of patience, as was demonstrated by the Central Bank in 2018, when despite a marked steepening of the yield curve, it resisted the clamor to raise the SELIC rate. If on that occasion the Bank had “followed the market”, it would have contributed to reduce, or even abort, the already slow cyclical recovery.

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