Brazil Just Got A New Tool To Stimulate Growth

Inflation falls within target range

There is good news on the horizon for Banco Central do Brasil –Brazil’s central bank – as far as inflation is concerned. The indicator, which has troubled monetary policymakers, has finally fallen below the upper end of the central bank’s target range.

The target mid-point of inflation in Brazil is 4.5% with a tolerance level of 2 percentage points on both sides, thus placing the upper end of the inflation target at 6.5%. Data from Brazil’s statistics agency, released before the scheduled monetary policy meeting, showed that CPI (consumer price index) inflation fell to 6.29% in 2016, much lower than the 10.67% pace seen in 2015.

Starting in 2017, the tolerance range has been reduced to 1.5% on both sides of the mid-point. Hence, the central bank will target inflation to remain between 3% and 6% this year.

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Inflation expectations

In the previous article of this series, we saw that the Banco Central do Brasil was not positive on economic activity.

However, it sounded pleased with recent developments in the rise of prices. In its monetary policy statement for January, the bank stated that “recent inflation releases were more favorable than expected. There are signs that the more widespread disinflation process has reached IPCA components that are most sensitive to the business cycle and monetary policy.”

In its latest weekly Focus Survey of economists, the median of expectations for IPCA inflation in the next 12 months stood at 4.8%. Meanwhile, in the central bank’s reference scenario, inflation should be around 4% in 2017 and fall to 3.4% in 2018. The central bank noted that market expectations for inflation are 4.4% and 4.5% respectively for 2017 and 2018.

Impact on monetary policy

Though it is too early to say that the challenge posed by inflation has been conquered, especially in light of the current global economic uncertainties, the fall in inflation is a welcome change for Brazil’s government.

With inflation under some control, policymakers can focus their efforts on resuscitating economic activity in Brazil, on which they have a bearish view at present. Though rate cuts alone would not get Brazil’s economy back on track, they would provide policymakers with an additional tool that they were previously unable to use due to high inflation – monetary policy.

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