We said that the BCB had to act, but the environment in which the Brazilian institution is conducting its monetary policy has drastically changed. Indeed, Brazil timidly leaves one of the most important recessions in its history and the political landscape has been buffeted by large-scale corruption scandals resulting in the impeachment of former President Dilma Rousseff. In the third quarter of this year, the largest economy in Latin America recorded a growth of only 0.1% over a quarter while data for the previous two quarters were strongly revised to +0.7% and +1, 3% respectively for the second and the first quarter of 2017 (vs +0.2% and +1% respectively in first estimate). On the political side, in spite of himself being a product of political turmoil, arriving after the impeachment of his predecessor, Michel Temer has been able to establish a form of budgetary discipline and set up a number of structural reforms in several sectors, including the oil and the labour markets. Nevertheless, the markets are worried about the difficulties the Conservative government has encountered in pushing pension reform, which is currently under consideration in Parliament. This reform is considered as the most important of a series of austerity measures to try to revive economic activity and fill a fathomless budget deficit.
From a more forward-looking perspective, there is a strong chance that economic growth will accelerate in coming quarters, notably in line with IMF forecasts. Indeed, the Washington-based institution forecasts growth of 0.7% this year and 1.5% in 2018. At Beyond Ratings, we anticipate a stronger recovery for 2018. However, a major stake could come play the spoilers: the general elections in October 2018. Beyond the fact that Brazil suffers from a political vacuum following the corruption scandals and that no pro-market “candidate” is in a good position in the polls, there may well be surprises with the return of former President Lula da Silva or a breakthrough by populist Bolsonaro.
Beyond the political uncertainties, no form of unanimity seems to emerge from the consensus as to what the BCB will do in terms of the conduct of its monetary policy in 2018. However, we believe that the BCB will end its easing cycle in the course of 2018 after one to two further cuts in its Selic rate in order to contain the disinflationary pressures currently at work.
Julien Moussavi, Head of Economic Research