Itaú BBA - A Better Ride in LatAm - October 2012

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A Better Ride in LatAm - October 2012

October 4, 2012

In Brazil, more tax cuts and more stimuli. In Argentina, mild recovery underway. In Mexico, no hikes in sight. In Colombia, resilient growth.

Global Economy
More Stimulus; Activity Stabilizing
Major central banks injected another round of stimulus. As financial conditions improve, economic activity is likely to benefit, continuing to stabilize at low growth levels

More Tax Cuts, More Stimuli
We expect further declines in the primary budget surplus in coming years

Mild Recovery Underway
The Argentine economy has entered a soft recovery phase. International reserves may be used to finance capital expenditures

No Hikes in Sight
Within-target core inflation and looser monetary policy in the core economies make hikes unlikely

Solid Pace
Inflation was again surprisingly low

Impulse from Domestic Demand
Despite weaker exports, the economy accelerates

Resilient Growth
The economy regained its strength

Focus is on Demand, for Now
Volatility and mixed performance

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A Better Ride in LatAm

Markets beamed when the Fed announced “QE Infinity,” its open-ended program of bond purchases. Earlier, Germany’s Supreme Court gave the nod to Europe’s bailout fund, augmenting the ECB’s bond-buying powers. More recently, the Bank of Japan surprisingly extended its program of asset purchases.

In short, central banks are again the bearers of good news – with the usual caveats about inflation and other medium-term risks. The euro zone looks safer, for now. The challenges of fiscal reform in Spain, however, remind us of the difficult road ahead.

Meanwhile, Latin America is enjoying a good ride, at least in some economies.

In Brazil, low interest rates and a stable exchange rate have become the norm. A “new model” with a lower tax burden is expected to help investment and growth. Low interest rates are easing the cost of public debt, enabling tax cuts that help reduce the cost of production. After closing at 3.1% of GDP last year, we expect the primary surplus to stay at 2.6% this year and head to 2.2% in 2013.

Mexico and Chile continue to grow at a solid pace. Colombia and Peru are back on an upward trend. Argentina is leveling off after the sharp contraction seen in the second quarter of the year. Except for Argentina, domestic demand remains strong across the region. Rate hikes are, however, a limited option to curb demand, given fears that currencies might strengthen too much in a context of rising global liquidity. But as long as inflation stays low, the dilemmas of monetary and FX policies will be at most a side thought in most of Latin America.

Global Economy
More Stimulus; Activity Stabilizing
Major central banks injected another round of stimulus. As financial conditions improve, economic activity is likely to benefit, continuing to stabilize at low growth levels

Major central banks injected another round of stimulus in September. The European Central Bank (ECB) revealed its new sovereign bond-purchasing framework, reducing the tail risks stemming from the euro-zone crisis. The U.S. Fed resumed its balance-sheet expansion, which will continue until labor markets improve substantially. The Bank of Japan (BoJ) followed with an unexpected extension in its asset-purchase program.

Financial markets celebrated. The U.S. Standard and Poor’s 500 stock market index reached 1,460 points, its highest level since 2007.

Global economic activity, too, is likely to benefit from the monetary easing, and we expect its recent stabilizing trend to continue.

The ECB reduced the chances of a euro zone break-up, but the region’s economy remains in recession. The ECB has not acquired any bonds under its new program, and discussions about further monetary easing have already begun.

In the U.S., worries about the impending “fiscal cliff” and reduced growth are bound to increase over the remainder of this year. The Fed will try to counter-balance the fiscal headwinds, but it is unlikely to be able to avoid a sub-2% GDP growth rate next year. And there is a risk that the fiscal drag could be even stronger in 2013 and could be more prolonged than currently anticipated, perhaps lasting for the next few years. (We expect GDP growth of 1.8% in 2013.)

We have revised our short-term projection for the euro-dollar exchange rate to 1.25 euros per dollar at the end of 2012, from 1.20 euros per dollar previously.

Activity data indicate that the Chinese economy is stabilizing, but at lower growth levels. We already expected the policy response to the current slowdown to be moderate, but the authorities’ recent actions indicate that they might tolerate a slightly slower, but relatively stable, pace of economic growth. We have reduced our growth forecasts for China to 7.6% from 7.8%, for 2012 and to 7.7% from 8.0% for 2013.

Clearly, the policymakers’ task of reviving and adjusting growth in the post-financial-crisis world is not yet done.


In the past month, important risk events ended with policymakers delivering at the top end of investors’ expectations. The ECB detailed its conditional and unlimited program to purchase sovereign bonds – now called Outright Monetary Transaction (OMT). The German constitutional court ruled that the ESM can be ratified, without attaching major restrictions to its operations. Troika officials ended their latest reviews of Ireland and Portugal, praising the progress of adjustment in both countries.

Taken together, the ECB’s OMT and the ratification of the ESM are likely to keep financial conditions stable in Europe. But risks and uncertainties remain.

The prospect of an ECB intervention has sharply reduced the yields of Spanish bonds. As a result, Spain appears to be avoiding requesting aid from the EFSF/ESM bailout funds. Without making a formal request, the country is not eligible for the OMT. In our view, the country cannot put off seeking this assistance forever. The treasury’s access to bonds markets would immediately close if investors concluded that the ECB assistance is not coming. With around €20 billion ($25.9 billion) worth of bonds maturing at the end of October, this is a risk the Spanish government should not take.

Greece’s official creditors could delay until November their decision on whether or not to extend financial support to the country. The Greek government is struggling to find all the required budget cuts. We still expect an agreement. But the constant delays could change the situation.

In Portugal, despite the positive review by the troika, fiscal targets remain out of reach. With the consent of the official creditors, the government revised its goals for the budget deficit to 5.0% of GDP from 4.5% for 2012 and to 4.5% from 3.0% for 2013. Meanwhile, signs of austerity fatigue have emerged. Workers protested a proposed increase in their social-security contributions to 18% from 11%, which would have been combined with a cut in employer contributions. Prime Minister Passos Coelho withdrew the plan in response.

Meanwhile, indicators suggest that the euro zone economies remain in recession. The composite purchasing managers’ index is almost flat, at levels compatible with declines in activity since last April (see graph). This is consistent with our baseline scenario, in which euro-zone GDP falls by 0.2% (seasonally adjusted) in 3Q12, similar to the 0.17% drop in 2Q12.

United States

Adverse climate conditions sharply reduced agricultural production in the U.S. this year. The negative supply shock is affecting GDP, leading us to revise our projection for the annualized seasonally adjusted growth rate downward, to 1.4% from 1.8%, for the second half of this year. However, the slowdown is not enough to change our full-year 2012 forecast of 2.2%.

For 2013, the new monetary stimulus from the Federal Reserve provides a boost. In its last meeting, the FOMC decided to buy $40 billion of agency mortgage-backed securities per month, to continue Operation Twist until December and to extend the period it is likely to maintain low federal funds rate from “end-2014” to at least through “mid-2015”.

Moreover, the FOMC will now continue to purchase financial assets and employ other tools “if the labor market does not improve substantially.” And it now expects that “a highly accommodative” monetary policy stance will remain appropriate for a considerable time “after the economic recovery strengthens.”

With this new, more proactive approach, the Fed is supporting economic agent’s confidence and financial conditions. As a consequence, we have raised our GDP forecast for 2013 to 1.8% from 1.5%.

Looking ahead, the U.S. faces the risk of a fiscal cliff in the near term, with several short-term incentives – tax cuts, social welfare benefits – set to expire by December 31. Moreover, if politicians fail to agree on a path to reduce the budget deficit over the next decade, automatic spending cuts will be triggered next year. Altogether, the measures total 3.6% of GDP and have the potential to drag the economy back into recession.

President Obama and the U.S. Congress are currently negotiating over possible extensions. Republicans and Democrats have different fiscal programs and little incentive to compromise before the presidential elections on November 6. But even after the ballots are cast, the parties might not reach an agreement.

In any case, we assume that only one-third of the measures will actually expire, with a corresponding fiscal drag on economic activity of about 1.2%.

But won’t Ben Bernanke add more monetary stimulus to compensate for any fiscal shock?

Indeed, the FOMC has shifted to a more “dovish” policy reaction function. We suspect that its current stimulus program already anticipates some negative fiscal impulse. And if the drag turns out to be even stronger, the Fed will surely ease policy further.

Anyhow, monetary stimulus affects activity only after a time lag, and more importantly, it has limits. The further use of unconventional policies by the Fed shows the challenge to monetary policy in the current environment of interest rates close to zero.

Some slowdown induced by fiscal policy seems inevitable, particularly if the full fiscal cliff is allowed to happen. Although we foresee a pick-up in quarterly growth next year, the pace is slightly lower than it would be without any impact from the fiscal cliff (see graph). In our baseline scenario, real GDP grows by 1.8% in 2013, compared with 2.1% if all of the current policies are extended. If the full fiscal cliff materializes, the U.S. could slide back into recession, with GDP potentially declining by 0.3% next year.

For the exchange rate, with the reduction in the tail risks from Europe, at least for the moment, and the FOMC’s shift to a more dovish policy stance, we have revised our euro/dollar forecast path upward for the short term. We now expect an exchange rate of 1.25 euros per dollar by the end of 2012 (compared with our previous forecast of 1.20 euros per dollar).

However, we continue to see a weak euro in coming years. The region has weaker cyclical growth prospects, and there remain substantial risks associated with the euro crisis. Peripheral countries still face the challenge of increasing their competitiveness while dealing with their fiscal and banking imbalances. Hence, we maintain our forecast that the exchange rate will decline to 1.20 euros per dollar by the end of 2013.


The Chinese economy continued to grow at a subdued pace in August. Industrial production rose by 8.9% year over year, compared to 9.2% growth in July. On the demand side, real exports fell by 0.3% from a year ago. Fixed investment in manufacturing and real estate continued to decelerate, although the latter declined at a slower pace. We see better growth in consumption, with retail sales up 13.2% yoy (compared with 13.1% in July), and in infrastructure investment, which continued its recovery.

Meanwhile, the government has continued to provide only modest stimulus. It has helped to stabilize growth, but it has not done much else. In the latest round, in September, the government announced about 800 billion yuan ($130 billion, or 1.7% of GDP) of infrastructure projects. Most of this amount consists of already planned investments; moreover, their implementation spans a long period (four years on average). Hence, we expect these investments to have little short-term impact on economic activity.

We foresee new stimulus measures ahead, but they are likely to be limited in size and to have a modest impact on economic activity. Even though we did not expect strong responses to the current slowdown, the recent pattern suggests that authorities could be even more willing than we expected to tolerate a slightly slower, but relatively stable, pace of economic growth.

Authorities keep highlighting trade-offs between growth, structural adjustment and inflation. They are also keen to avoid the rapid growth in local-government debt and the real estate sector imbalances that were created by large-scale stimuli in 2008 and 2009. With consumer prices set to increase and property prices stabilizing at high levels, the environment seems to favor more moderate responses.

Finally, the focus of the new easing will probably remain on the fiscal side, with the anticipation of investment projects and tax measures that promote consumption and growth in specific sectors. In terms of monetary policy, after reductions in June and July, we do not see additional interest rate cuts this year. With house prices still high, restrictions on the real estate sector will likely continue.

All in all, we lowered our GDP growth forecasts for China to 7.6% from 7.8% for 2012 and to 7.7% from 8.0% for 2013.


The BoJ launched an unexpected new round of stimulus measures in September. The central bank increased the size of its asset-purchase program by ¥10 trillion ($129 billion), equally split between treasury discount bills and Japanese government bonds (JGB). The pace of expansion was maintained, with the deadline of JGB purchases extended from June to December 2013. The BoJ also removed the minimum bidding yield (previously at 0.1%) for government and corporate bonds to help with the execution of the asset-purchase program.

The BoJ also revealed a gloomier view on the Japanese economy. The central bank said that the pick-up in economic activity has come to a standstill. It also appeared concerned over the value of the yen, saying that “attention should be paid to the effects of financial and foreign exchange market developments on economic activity and prices.”

We agree with the BoJ’s assessment of weaker activity. The current data point to stagnation in the third quarter of 2013. But despite the BoJ’s efforts, the economy, in our view, will continue to grow at lower rates. Thus, we have maintained our GDP growth forecasts of 2.4% for 2012 and 0.9% for 2013.

Commodities: Volatility and mixed price performances

The global economy set the tone for commodity prices in September. Looser central bank policies and lower tail risks in the euro zone provided a strong boost to basic and precious metals, breaking the bearish mood that had prevailed since the beginning of 2012. Energy and agricultural prices, which had previously had the best performances, declined from their recent peaks. But even these declines appeared to us to reflect mostly investor’s moves to other asset classes, like equities, than a change in the fundamentals.

We maintain our scenario of high grain prices, sustained energy prices and lackluster metal prices, mirroring the moderate growth rates in China and around the world. As a result, our Itaú Commodities Index (ICI) forecast changed only marginally this month. We currently expect the ICI to post an increase of 24.6% (down from 25.7% previously) for 2012 and to decline by 9.2% (previously ‑9.7%) in 2013.

The interruption of the upward trend in agricultural prices reflected a speedy harvest of corn and soybeans in the U.S. and the much-awaited return of rains in the Center-South region of Brazil. But some profit-taking, after almost three months of uninterrupted gains, also played a role. Looking forward, the main drivers of grain prices will likely be demand behavior and climate conditions during South America’s crop season. We expect prices to resume their rise as demand still needs to be rationed ahead of South American harvest in the first quarter of 2013.

Oil prices have retreated from their mid-September peaks. We do not see any changes in fundamentals that justify this drop. Indeed, we expect prices to move up after the U.S. elections, given looser financial conditions and higher geopolitical risk. Therefore, we have revised our year‑end oil-price projections upward, to $112 from $108 in 2012 and to $116 from $102 in 2013.

Finally, prices for precious and base metals rebounded sharply in September, with gains of 8.6% and 11.5%, respectively. Lower tail risks and monetary easing in developed economies and the infrastructure investment package in China contributed to the movement. While more monetary expansion is likely to keep precious metals in the spotlight, we do not think that the rally is sustainable, especially with global economic activity stabilizing at low-growth levels. Therefore, we have left unchanged our medium-term forecast of only modest gains in metal prices.

More Tax Cuts, More Stimuli
We expect further declines in the primary budget surplus in coming years

We have lowered our forecast for the primary budget surplus to 2.6% of GDP (from 2.8%) in 2012 and 2.2% (from 2.6%) in 2013, due to a sequence of low budget results recently and additional tax cuts expected for next year. The government has maintained the exchange rate  at weaker levels, and signs indicate that it will remain there for a while longer. We have therefore revised our forecast for the exchange rate to 2.0 reais per dollar (from 1.95) by year-end. For 2013, we have maintained our estimate at 1.90 reais per dollar. Our GDP growth estimates are at 1.7% for 2012 and 4.5% for 2013; for the consumer price index (IPCA), our estimates are at 5.5% for 2012 and 5.3% for 2013. In this context, our forecast for the benchmark Selic interest rate remains at 7.25% by the end of 2012 and 8.50% by the end of 2013.

Fiscal policy in the “new model”[1] 

The fiscal performance has been on a declining trend in recent months due to a cyclical slowdown in tax collection, the (still-limited) impact of tax cuts, and a consistent acceleration in public spending. In August, the annual primary budget surplus stood at 2.5% of GDP, down from 3.1% at the end of 2011.

Government revenues have underperformed expectations this year, leading us to reduce our 2012 primary balance forecast to 2.6% of GDP (116 billion reais) from 2.8% (123 billion reais). We maintained our federal expenditure growth forecast for this year at around 7% in real terms.

For 2013, we expect a looser fiscal stance, particularly within the federal government. We believe that the “new model” of economic policy will bring, alongside lower interest rates, new stimuli to gross fixed-capital formation, either through tax cuts or higher public investment. This strategy to reduce costs in the economy will bring about a decline in the primary surplus. With the recent fall in interest rates, the cost of public debt will go down in coming years even with a lower primary surplus, creating room for a more expansionary fiscal stance.

We assume total tax cuts worth 70 billion reais next year, out of which 30 billion reais have already been announced. We had previously estimated 30 billion reais in tax cuts. Larger tax stimuli should slow down the recovery in government revenues (following the rebound in economic activity) next year. Thus, we revised down our forecast for the 2013 primary surplus to 2.2% of GDP (110 billion reais) from 2.6% (128 billion reais).

The set of tax breaks already announced so far includes payroll-tax cuts in many sectors, lower taxes on electricity tariffs and on acquisition of capital goods. The additional tax reductions contemplated in our scenario could include more of such measures or new initiatives on the tax front (e.g., focusing on sales taxes such as PIS/Cofins and ICMS).

In recent weeks, important budget decisions were taken. Some of these measures should help limit the expansion in administrative expenses and government transfers in the short and medium term. Among those: setting a 5% annual nominal increase in wages of many categories of federal employees for the next three years; and keeping in the 2013 draft budget the current minimum wage rule, likely to prompt a nominal increase between 8% and 9% in 2013 (vs.14% granted in 2012). 

Still, we forecast a rapid expansion in federal expenditures next year: around 7% in real terms, boosted by investment spending (including outlays related to the Minha Casa, Minha Vida low-income housing subsidy program) and other discretionary expenses.

We believe fiscal policy will take a more expansionist tone next year, both on the spending and revenue side. This looser stance should contribute for a pickup in the economy in 2013. The greater the contribution of tax cuts and investment (or, alternatively, the smaller the stimuli through current spending), the greater the eventual contribution of this fiscal expansion to activity in the long run.

Exchange rate: A longer-lasting decoupling from fundamentals

The exchange rate is still moving very little and remains slightly above 2 reais per dollar, despite recent pressure for appreciation. The strong correlation between thereal and its peers – commodities currencies – is no longer being observed.

Given this picture of tight fluctuation and actions to keep the real on a weaker level, we changed our forecast for the exchange rate in December 2012 to 2.00 reais per dollar (from 1.95). Greater global liquidity, lower market volatility, the drop in Brazilian risk premium and rising commodity prices are compatible with a stronger currency in the medium term. Therefore, we are keeping our forecast for the exchange rate by the end of 2013 at 1.90 reais per dollar.

In the balance of payments, there were no significant surprises. In August, the current account deficit reached $2.6 billion, marked by a high trade surplus and subdued profit and dividend remittances. On the financing side, foreign direct investment (FDI) was $5 billion, down from $8.4 billion in July. Over 12 months this flow represents 2.8% of GDP, ensuring comfortable financing of the current account gap, now at 2.1% of GDP.

Among the other flows, the highlight was the inflow of $1.3 billion to the local stock market, which had been getting low flows in recent months. We maintained our forecast for the current account deficit at 2.2% of GDP in 2012, climbing to 2.5% in 2013, due to a narrower trade balance ($13 billion, vs. $18 billion in 2012) and more profit and dividend remittances. In our view, FDI will remain at high levels, ending 2012 at $61 billion and rising to $64 billion in 2013.

Growth picks up in the third quarter

Economic activity data published in recent weeks reinforced our forecast of 1.2% qoq/sa GDP growth in the third quarter. August data suggest high growth in our monthly GDP proxy, following moderation in July. At the margin, we see growth a bit more broadly based.

There are positive signs arising from the improvement in confidence among industrial entrepreneurs. The index accumulated an increase of more than 2% in August and September. The acceleration in the component of forecasted production stood out, indicating sharper increases in industrial output ahead. Improved confidence is a positive sign for expansion of current activity and for a more consistent rebound in investment in the coming quarters. Consumer confidence is up again, reinforcing the outlook of sustained sharp growth in consumption.

Though fundamentals improved and there is some evidence of broader-based growth, uncertainty remains high. We see more downside risks than upside risks to growth in the fourth quarter. The contribution from the auto sector tends to be smaller. Thus, investments must accelerate in order for GDP expansion to remain high, even with slower growth in consumer spending.

Bank credit cooled down again in August, marking a second month of declines. New loans to consumers dropped by 2.0% (adjusted for inflation and seasonality), following a 4.0% drop in the previous month, but concentrated on bank-overdraft facilities and personal loans. Similarly, new corporate loans fell by 3.0% during the month, after a 2.8% drop in July. Rising confidence indicators, a heated labor market, rising credit demand and greater confidence among players in a rebound in domestic activity justify the expectation of a resumption of credit expansion in the next few months.

Interest rates and spreads remain on a downward path for companies as well as consumers, albeit at a lower speed than in March and June. Delinquency rates remained unchanged in almost all categories, showing stability at a high level (the performance of new credit crops suggests a decrease in delinquency in the future). State-owned banks keep gaining market share.

Acting to increase liquidity in the financial system and boost the economy, the Central Bank lowered reserve requirements in September (for further details, please refer to “Brazil – Lower Reserve Requirements Free Resources for the Economy”). Purchases of loan portfolios and debt securities known as letras financeiras from smaller banks stand as options to meet the requirement for that share. Motorcycles became a new alternative, replacing automobile-financing portfolios. According to the Central Bank’s calculations, together these measures should free 30 billion reais for the economy in the next few months (leaving total reserve requirements at 350 billion reais).

This information is compatible with our expectations for GDP growth. We maintain our estimates at 1.7% in 2012 and 4.5% in 2013. Thus, our scenario still contemplates a pickup in economic activity in 4Q12 and 1Q13. Our scenario of further tax cuts, particularly in 2013, reinforces the expectation of higher growth in coming quarters.

We lowered our forecasts for the unemployment rate in 2012 and 2013, although our growth outlook was maintained. Job creation data show a slowdown, but it is not intense enough to prevent a decline in the unemployment rate. Growth composition – with manufacturing underperforming the service sector – continues to explain to a large extent the persistently low unemployment rate within an environment of moderate GDP growth. We now forecast an average unemployment rate of 5.5% in 2012 (down from 5.7%) and 5.2% in 2013 (down from 5.6%).

Inflation: Uncertainty about 2013 remains high

We forecast consumer inflation (IPCA) at 5.5% this year and at 5.3% in 2013. Current data indicate that inflation should accelerate in the coming months (monthly average of 0.55% until year-end), with pressure from the food group taking the spotlight. This upward movement in food prices will largely occur through the transmission of the shock in international grain prices to some food items, such as meats and wheat byproducts. With forecasted inflation at 5.5% this year, market-set prices should rise by 6.3%, while regulated prices should go up by 3.1%.

The electricity package pushes inflation estimates downward (please see details in Macro Vision “Impact of the Electricity Package on Inflation”). Assuming that the average tariff for residential consumers will drop by 16.2% at beginning of 2013, as announced by the government, the direct impact on the IPCA would be -0.53 pp, given the weight of electricity on the official inflation index (3.3%). However, our inflation calculations for 2013 already considered a share of the announced reduction in electricity tariffs. The difference of the factors above compared with our scenario amounts to -0.10 pp on the IPCA next year.

In our scenario, we contemplate further tax cuts, which should impact inflation. The effect on prices is uncertain, as it depends on the type of cut. We incorporated in our forecasts an additional impact of -0.10 pp on the IPCA in 2013 due to the greater volume of tax cuts we expect for next year. This impact may come, for instance, from tax cuts on food items that form the so-called cesta básica. Tax cuts may also be used to prevent inflation from rising, as is the case of gasoline prices – the reduction in PIS/Cofins could prevent a pass-through to prices at the pump (our scenario already contemplated this premise for 2012, but it could also happen in 2013).

The additional impact from the electricity package (-0.1%) and more tax cuts (-0.1%) on inflation in 2013 was offset by our expectation of lower unemployment. Despite our inflation forecast being unchanged at 5.3%, its composition has changed. We now expect smaller price increases for food and regulated items, and a sharper increase in service prices.

Recent IPCA reports have shown high core inflation and high diffusion indexes, indicating some robustness in inflation, while expectations (as measured by the Focus survey) have remained at levels above the mid-point of the target. We maintain our opinion that there is still a lot of uncertainty for the inflation scenario next year, with factors that could mitigate it as well as push it up.

Central Bank: Neutral balance of risks

In its Inflation Report (IR) for the third quarter, the Central Bank described the domestic balance of risks for inflation in the relevant monetary policy horizon as “neutral”. In the June IR, this balance had been characterized as “favorable.”

For the Central Bank, the external scenario manifests “inflationary bias in the short term”; being “impacted by supply shocks arising from external weather events, whose effects may be leveraged by recent non-conventional monetary policy actions.” However, the Central Bank stresses that the external influence is disinflationary in the medium term by contemplating low global growth for a prolonged period.

Given this scenario, the Central Bank maintained the signal of the last monetary policy committee (Copom) meeting: “if the prospective scenario requires an additional adjustment in monetary conditions, this movement should be conducted with maximum parsimony.”

For the long term, the Central Bank indicates that it is comfortable with maintaining real interest rates close to current levels. First, through the disinflationary evaluation of the external scenario over time. Second, by reinforcing the view that the neutral interest rate has been falling.

We understand that recent signals by the Central Bank reinforce the perception that the easing cycle in interest rates is finished or close to it. We maintain our forecast that the Central Bank will reduce the Selic rate by 25 bps to 7.25% in October, remaining at that level until mid-2013.

[1]For reference, we recommend reading “The New Model”, by Ilan Goldfajn, published in O Globo newspaper on September 4, 2012.

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