Brazil: A Patient Monetary Policy

The first policy meeting headed by new BACEN governor Roberto Campos Neto, taking place Wednesday, should not alter the recent policy guidance. The SELIC rate should remain unchanged, at 6.5%, and the guidance should reflect continuity and patience, in the face of uncertainties regarding the social security reform, the defining event of the year in Brazil.

Economic fundamentals could justify a slight dovish shift ...

Recent developments on inflation and, especially, activity fronts would suggest that the outlook for monetary policy in Brazil has turned slightly more dovish in recent months. 

As the chart below demonstrates, inflation expectations remain fully anchored, with the central bank survey indicating that inflation should undershoot the 4.25% target in 2019, for the third consecutive year, and match the new lower targets, 4.0%, and 3.75% respectively, in 2020-21. 

The survey also suggests that the outlook for economic activity has deteriorated slightly, with recovery expectations being pushed back towards 2020, as the full range of recent data, from employment to industrial activity, remained frustratingly weak.

Central bank surveys reinforce prospects for subdued inflation and a delayed recovery

(Click on image to enlarge)

Source: Macrobond

Even though confidence indicators have surged since last year’s Presidential election, persistent uncertainty regarding fiscal challenges suggests that investment decisions and credit growth may take a bit longer to materialize, limiting the near-term activity momentum. 

But, as seen in the successful auction of 12 airport concessions last week, investor appetite is not as grim as activity data currently suggests, which bodes well for a relatively speedy post-reform recovery.

... but additional monetary stimulus remains conditional on fiscal progress

Lingering uncertainties regarding the approval of the all-important social security reform also continue to loom large for the monetary policy outlook. In fact, so long as reform approval is uncertain, policymakers may continue to opt to proceed more cautiously than inflation and economic activity data may justify.

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