Itaú BBA - Has the interest rate channel stopped working?

Macro Vision

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Has the interest rate channel stopped working?

May 16, 2019

We see evidence that the power of monetary policy increased significantly in recent years

For the version with all charts and tables, please open the attached pdf file.
 

 The weakness of economic activity, in a context of historically low interest rates, has fueled a debate about the power of monetary policy. Is it possible that the economy is not responding to monetary stimulus?

 We believe the opposite. We see evidence that the power of monetary policy increased significantly in recent years as the relevance of subsidized credit receded. In other words, monetary policy is now affecting the economy more effectively than in the past.

 According to our analysis, the economy has not been growing at stronger rates because it is facing unfavorable developments on the demand side and the current interest rate (2.8% in real terms) is still higher than the level required for the economy to grow faster. In our view, the neutral interest rate declined due to the fiscal and quasi-fiscal adjustment.

 We expect the Central Bank to start a new easing cycle in September, a scenario strictly dependent on the pension reform approval. These interest rate cuts, in our view, will contribute to faster growth in 2020.
 

Luka Barbosa
Alexandre Gomes da Cunha
 

For the version with all charts and tables, please open the attached pdf file.



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