Depec-Bradesco Economic Highlights - Economia em Dia

Depec-Bradeso Economic Highlights
If the pace of economic activity over the next few months
is still incompatible with the convergence of the infl ation
cores onto the center of the target, another signifi cant
question that the Central Bank will have to deal with will
relate to the instruments to be utilized in order to bring
about convergence. An important part of the diagnosis
of the current deceleration of economic activity is due
to the interpretation that the increase in imports and the
“weakness” of exports of manufactured goods is acting
like a brake upon GDP growth, channeling overseas
the excess domestic demand 2 . This diagnosis, coupled
with the unusual circumstances in the manner which
monetary policy is being implemented in the world mean
that the traditional usage of interest rates by the Central
Bank may be less intense in the present monetary
tightening cycle, in case a greater-than-presentlyexpected
increase is required. This is because of the
fact that the increase in interest rates has an impact
on the FX rate, making it appreciate even more during
a time of excess global liquidity.
8,0%
6,9%
7,0%
6,0% 5,8%
5,0%
4,0%
3,0%
2,0%
1,0%
0,0%
-1,0%
-2,0%
4,1% 3,8%
3,4%
2,3% 2,0% 1,8%1,6% 1,5% 1,4% 1,3% 1,2%
1,0% 1,0%
If the Brazilian Central Bank is one of the only ones to
excessively raise interest rates in this global context in
which the interest rates of the developed countries are
extremely low – and operating by means of quantitative
mechanisms – and the emerging economies are making
greater use of macro-prudential measures than of
interest rates, then Brazil’s FX could perhaps register
an excessive appreciation. Such an appreciation in
the real would aggravate the economy’s external
competitiveness 3 . The signs given off by the present
administration suggest that this is an important theme
for the economic policymakers and, therefore, the side
effects of raising interest rates cannot be overlooked
in this economic policy framework. As a result, any
aggressive action in terms of raising interest rates in this
phase, in addition to not being justifi ed on account of the
slowing down in economic activity, does not seem very
likely in our opinion, as it would aggravate the external
leak and intensify the deceleration in economic activity
that is already underway.
0,4% 0,2% 0,2% 0,2%
Venezuela
Serbia
Romania
Estonia
Greece
Uruguay
Indonesia
U K
Portugal
Thailand
Singapore
Malta
Brazil
Spain
Belgium
Colombia
Slovakia
Poland
India
Korea
Luxemburg
Hungary
Finland
China
Austria
Mexico
South Africa
Euro Zone
Canada
Italy
Slovenia
France
Holland
Germany
Australia
Cyprus
Sweden
Ireland
Czech Republic
USA
Peru
Philippines
Chile
Therefore, in our opinion, the Copom will raise interest
rates by 50 bps at this meeting and will wait to see the
results of this monetary policy action combined with
the macro-prudential, fi scal and para-fi scal measures.
In addition to being effective, it seems to us that these
actions will be come on top of a deceleration that is
already underway in the factor that has been the main
vector of infl ationary acceleration over the last few
months, namely the labor market. As a result of this,
in our opinion there is no justifi cation for any more
-0,3%
-1,0%
Comparison
between the
12-month infl ation
differential
(headline) and each
country’s infl ation
target
Source: CEIC
Produced by: BRADESCO
pronounced acceleration in the intensity or total size
of the interest rate cycle, at the very moment in which
the vectors that govern infl ation are pointing to a much
more favorable outlook for the cores.
Summing up, we are not underestimating the infl ationary
phenomenon and we recognize that inflation is a
challenge that faces Brazil as well as dozens of other
countries. However, the already clear endogenous
or induced signs of deceleration lead us to believe
2 Nor can we fail to take into account that part of the deceleration that is already being seen in the economy may be the result of the increase in interest
rates that the Central Bank implemented during the fi rst half of last year, the empirical results of which were expected to be seen at the end of that year.
Although the transmission channels of that interest rate increase are not clear – after all, interest rates on credit continued to drop, the level of confi dence
of businessmen and consumers was not affected – it is possible that the appreciation in the real FX rate that followed and households’ consumption and
savings decisions have meant that the increase in interest rates was transmitted to economic activity. Incidentally, the interest rate that matters to the
economy is the real swap rate and this has been increasing since the middle of 2009 by roughly 2.0 p.p. during the period, which leads us to believe that,
in effect, part of the economic activity adjustment may have come through this channel.
3 This appreciation would certainly help to reduce infl ation, and the increase in interest rates would eventually lead to a decrease in the country’s external
defi cit at a later time, on account of the moderating effect on domestic demand. However, initially the effect would be to aggravate the loss of competitiveness.
DEPEC
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