LCA Weekly Macro View: Brazil: recovery still insufficient to narrow the significantly negative output gap

LCA Weekly Macro View: Brazil: recovery still insufficient to narrow the significantly negative output gap

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Chamber Member News Post Date: 12/05/17 Source: LCA Consultores By: LCA Consultores
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Summary

Recent developments in the US - such as the positive revisions to the 3rd quarter GDP, the robust readings on capital goods orders and ISM surveys, the approval of the tax overhaul by the Senate - have given some support to the US Dollar in the global currency markets in last few days.

The appreciation of the US Dollar, however, has been limited by inflation readings, that have continued to surprise on the downside: PCE and core PCE deflators for October came in below expectations, in contrast to the FED’s regional offices’ Beige Book having reported higher price pressures in recent months.

All in all, we expect the FOMC to once again hike the benchmark interest rate this month and maintain the forward guidance of three more hikes next year. This, because inflation is expected to pick up once the output gap should shift from the negative territory that has prevailed since de 2008 global financial crisis to a neutral (or even to a slightly positive) stance in 2018.

Should this pace of monetary policy normalization in the US prevail, most emerging currencies will be under some pressure in 2018, including the Brazilian Real (BRL). But the BRL depreciation expected for 2018 should not put the inflation target at risk, especially because the output gap in Brazil is still in a significant negative territory.

Thus, monetary policy in Brazil is expected to remain in an easing bias in the turn of 2017 to 2018, supporting con-sumption through the credit spigot. This should compensate some headwinds expected for household consumption next year, such as the low readjustment of the minimum wage - that is expected to shrink in real terms.
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