Brazil's monetary policy to curb inflation

Although elements of Brazil's predicament have been brewing for years, 2014 was a turning point in some respects, including in particular fiscal and monetary policy. In response to rising inflationary pressures associated with an overheating economy, the central bank initiated a tightening cycle in early 2013. 

However, the tightening cycle was interrupted in April 2014, a pause that could have been interpreted as influenced by the then ongoing presidential election campaign. The election was resolved in President Rousseff's favour in a close second-round vote on October 26.

The resumption of the tightening cycle four days after the election was necessary and welcome, but may have complicated the political backdrop in a couple of ways. First, the decision (along with announcement of a more orthodox approach to the budget) may have been interpreted as backtracking by the government, which had campaigned on a less orthodox conversation about inflation targeting, central bank autonomy, and fiscal policy.

This may have contributed to the sharp post-election decline in President Rousseff's approval rating, which has constrained the government's room for policy maneuver within the most fragmented Congress in the democratic history of the country. The aggressive easing initiated in 2011, taking the Selic rate to its historical lows of 7.25%, and the pause in the 2014 tightening cycle may also have created or reinforced perceptions that the central bank lacks the operational autonomy that it is perceived to have enjoyed during the Cardoso and Lula presidencies, says Barclays. 

Whether such perceptions are objectively correct is to some extent beside the point; the mere perception that the central bank's room for maneuver could be compromised in a sufficiently fraught political environment is damaging to the institution's capacity to manage expectations and control inflation.