ECO211 Written Report Inflation in Brazil PDF

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ASSIGNMENT ECO211: MACROECONOMICS WRITTEN REPORT: MACROECONOMICS PROBLEM CLASS: BA119 3G GROUP 6: BRAZIL - INFLATION

PREPARED BY: BIL

STUDENT’S NAME

MATRIC ID

1.

SARAH BATRISYIA BINTI ANUAR

2019260732

2.

FARIDZA ADLEENA BT MOHD AZIZUDDIN

2019237536

3.

SITI NURFATIHAH BT ROSIDI

2019253154

4.

SITI NURMUFLIHAH BINTI FADZIL

2019284948

PREPARED FOR: DR. FUAD

TABLE OF CONTENT BIL. 1.0

TABLE OF CONTENT

PAGES 3-5

Introduction 1.1 Background of Brazil 1.2 Inflation of Brazil 1.3 Inflation rate

2.0

Analyzing Current Macroeconomics Problem

6 - 10

2.1 Fiscal Policy Inflation 2.2 Monetary Policy Inflation 3.0

Conclusion

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4.0

References

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1.0 INTRODUCTION

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1.1 Background of Brazil Brazil is the largest country in South America also the fifth largest nation in the world. The fact shows about form an enormous triangle on the eastern side of the continent with a 4,500-mile coastline along the Atlantic Ocean. It has borders with South American country excluding Chile and Ecuador. All residents of Brazilians are descended from three ethnic group, include Amerindians, European, and Africans. This country has current population at 212,559,417 people. In the 19 th century, waves of immigrant from Europe, the middles East, and Japan added to this mix. Brazil diversity of culture has created a rich religious, musical and culinary culture. This country famous about soccer and more produced some of the best of the players. Brazil is a federal republic with a president and a judiciary. At 1888 until recently, this country struggle with democracy, but in 1985 the government was freedom removed, and by 1995, finally Brazil’s politics and economy had become stable.

1.2 Inflation of Brazil Inflation is a complex social phenomenon with many causes and determinants that change in importance over time. It also measured by the buyer cost list reflects the yearly rate alter within the cost to the average consumer of obtaining a wicker container of goods and administrations which will be settled or changed at indicated interims, such as annually. Brazil is a wide and closed economy that can be. The inflation occurred because lack of trade, that means prices have to react more strongly to internal supply shocks.

1.3 Inflation rate

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Figure 1.2 Inflation rates in Brazil from 2011 to 2020 Brazil's yearly inflation rate is anticipated to rise to 10.33% in December 2015, diminish to 6.64 following year, analyst almost 100 private monetary teach anticipated at the most recent a FOCUS Advertise Readout discharged by the central bank on November 20th. The expansion figure still remains higher than the government's target of 4.5 percent and restricting room for intrigued rate cuts which are anticipated to remain at 14.25 percent until the end of the year and at 13.75 % through 2016. Meanwhile, the economy is expected to contract by 3.15 percent in 2015 and by 2.01 percent in 2016 and mechanical generation to decrease by 7.50% in 2015 and by 2% in 2016, unveiling the most exceedingly worst financial performance since 1990. Annual inflation rate in Brazil eased to 9.49 % in 2015 from 9.53 % in the previous month, the lowest in three months and matching market expectations. The inflation decelerated slightly for the second straight month after reaching a nearly 12year high of 9.56 % in July, a sign inflationary pressures may be slowing after the central bank rate-hike campaign increased borrowing cost to its highest in nine years. Customer prices in Brazil expanded 6.29 % year-on-year in December of 2016, easing from a 6.99 % rise in November and below advertise expectations of 6.34 %. It was the lowest inflation rate since April of 2014 primarily due to a lull in nourishment fetched. A year prior, expansion was much higher at 10.67 %. Consumer costs in Brazil expanded 10.71 % year-on-year in January of 2016, quickening for the fourth straight month and coming to a new 12-year high. Figures came slightly over showcase expectations mainly due to a rise in food costs. The

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nation is struggling with stubbornly tall expansion since mid-2014 after the government imposed a few charge increases aiming at balancing the general budget while a weak real pushes import costs up. The real fell around 47 % to the USD in 2015. The expansion rate in Brazil eased for the fifth month to 5.35 percent in January of 2017, the lowest since September of 2012, and underneath showcase desires of 5.41 percent. Inflation slowed faster than anticipated within the past four months due to weaker requests and a stronger real and after reaching twofold digits a final year. The central bank expects inflation at around 4 % in 2017. Brazil's customer cost inflation rate rose to 4.31 % year-on-year in November 2020, the most elevated since December final year and above advertise expectations of 4.2 %, primarily boosted by a 15.94 % increase in food & refreshments prices, the steepest since October 2003. The additional upward pressure came from transport (1.21 %), housing (1.47 %), health care (1.53 %), individual costs (1.30 %), education (0.84 %), and communication (3.70 %). Clothing costs, in any case, declined 1.70 %. On a monthly basis, customer costs rose 0.89 %, the greatest increase for November month since 2015. The yearly inflation rate in Brazil was about consistent at 3.78 % in January of 2019 from 3.75 % in December, compared to market desires of 3.7 %. Food expansion was the highest since February of 2017 whereas fuel costs slowed strongly, mainly due to gasoline. Brazil's yearly inflation rate 3.92 % in October 2020 from 3.14 % within the previous month and compared with market expectations of 3.90 %. It was the highest inflation rate since February, as a cost on food & refreshments increased to an over four-year high (13.88 % vs 11.79 % in September). In addition, costs went up to assist for housing (1.74 % vs 0.76 %) and communication (3.38 % vs 3.15 %). Moreover, the cost of transport rebounded (0.18% vs -0.56 %) while clothing costs fell at a softer pace (-1.43 % vs -1.90 %). On the other hand, costs slowed for individual costs (2.53% vs 2.55 %); health (1.87 % vs 1.99 %); and education (0.94 % vs 1.01 %). On a monthly basis, consumer prices advanced 0.86 %, the most since December last year, after a 0.64 % gain in the earlier month and somewhat over figures of a 0.83 % rise.

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2.0 Analyzing Current Macroeconomics Problem 2.1

Fiscal Policy Inflation

The Brazilian Fiscal Responsibility Law (FRL), the first of its sort to be received by an arising economy, incorporates the two standards, (for example, the equilibrium of the spending plan in the long haul) and explicit cutoff points, just as an accentuation on straightforwardness. It just indicates one limitation, to consent to an express sacred choice, which applies to spending on the compensation finance: the most extreme ought to be half of current income for focal government and 60% for different governments, with sub-limitations for forces and bodies, just as a prudential breaking point (which, whenever surpassed, restricts wage increments and recruiting). Another frequently referred to restrict for public obligation is directed by the FRL, which covers on what premise it will be applied, how, and how it will be changed. The public obligation roof itself was fixed sometime in the not too distant future by the Senate, started by the President, yet without the forces of blackball. The FRL itself incorporates some get-out provisos, for example, exception from agreeing to limits in case of debacle, low development or downturn, extreme changes of financial approach or if there is a solicitation from the Senate Executive. In any case, being a strengthening demonstration (it requires an exceptional majority and can't be changed by official act), is likewise applies to provincial governments and, customarily, is entirely steady (it can't be corrected by a selective demonstration of the Federal Executive). Moreover, one mainstay of the FRL was to restrict the focal government assuming obligations from different governments or advancing to then straightforwardly – an exemplary issue in a nation which has just experienced progressive interior and outside moratoria of territorial governments which have wound up being accepted by the focal government. In this broad diagram of occasions, the presentation of the FRL can be viewed as the demonstration which united or finished up the cycle of institutional changes. Amidst this, the budgetary cycle was reformulated, income, bookkeeping and money organization was modernized, most open organizations and banks were privatized, and local obligations were rethought by the focal government, in addition to other things. In the event that after the FRL few advances were rolled out in improvements to financial enactment, the equivalent isn't valid for the field of the executives, where endeavors kept on being made to modernize monetary organization in its

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exceptionally assorted exercises. This is the situation, for instance, for the public government and a large portion of the provincial governments embracing a coordinated arrangement of spending the executives, bookkeeping, money and value (known as SIAFI), and furthermore the utilization of electronic monetary notes in tax assessment (the issue includes an on-line record in depository checks), diminishing expenses for citizens and making crafted by charge assortment associations simpler and more effective. A majority rule government and relative self-ruling alliance are specific to Brazilian monetary administration. Each unit of government are openly to settle on their own choice. It is dependent upon the government to attempt to practice some control. The vital variable in public monetary administration is the administration of reworked obligation since most local government actually owe a ton to the Treasury itself on record at the distinctive financing plans actualized before the FRL was brought out. In the event that the focal government concedes these legislatures the capacity to contract new credit tasks, the territorial essential excess just deteriorates. Another part of the present circumstance is the developing analysis, especially from political researchers, that the nation amazingly is encountering another rush of political centralization, as territorial governments' space for move in financial terms is extremely restricted (Ismael 2013). As per an article on Rurters.com, "Brazil's administration stays focused on financial order". Their monetary plans are to animate the economy by lessening public interests in the "Development Acceleration Program"; if tax breaks for the two organizations and purchasers; and broadened an expense decrease for nearby vehicle creators. In spite of the fact that a decrease in government spending repudiates an upgrade, the most they can deduct is 40.6 billion reais (nearly $20 billion), and note this decrease will be "the littlest conceivable" if even expected by any means. Yet, with the tax reductions the public authority is giving, they trust they increment spending by the private areas enough to making up for the diminished spending. It is now estimate by Brazil's Central Bank that the spending overflow they are attempting to accomplish won't be met, however Brazil's administration stays confident. The great exhibition of financial markers, notwithstanding, was joined by changes in the profile of the primary factors. In spite of done reacting to outer or monetary emergencies, as in the new past, the general taxation rate stays high and

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is expanding, which has also permitted public spending to develop and to thusly make the most elevated essential excess over the most recent twenty years. It was not by chance that public obligation, traditionally estimated by the idea of getting and which tallies the national bank, atypically, as a feature of the public area, tumbled to where it set off the amassing of unfamiliar stores from the center of the most recent decade. Since Brazil gathers markers for the entire public area and incorporates the national bank, the stores are deducted from the liabilities and accordingly unfamiliar obligation gets negative, with a solid relationship between net acquiring and the conversion scale: perplexingly, episodes of maxi-deterioration pay off open obligation radically, while occurrences of thankfulness cause it to rise. It is a bizarre circumstance and fundamentally not the same as that of different nations.

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2.2

Monetary Policy Inflation

Starting from the year 1999, the first feature of the Brazilian macroeconomic ‘tripod’ which consists of a primary surplus target, an inflation targeting system, and a floating exchange rate has become their fundamental aspect to control inflation and re-balancing external and public accounts (Giambiagi, 2008). The floating exchange rate which is a system where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies, was implemented by the Central Bank of Brazil to regained control of monetary policy. The fluctuation in values allows traders and firms to increase or decrease their holdings and profit off them. The inflation target system was methodized by the basic interest rate of the economy called “Sistema Especial de Liquidação e de Custódia” (SELIC). The Selic is the main monetary policy instrument used by the Central Bank (Banco Central BC) to control inflation. It influences all interest rates in the country, such as interest rates on foreign interest rates, loans, financing, and financial investments, attracting and contributing to the appreciation in the value of their national currency.

Figure 2.2.1 Interest rates fall in Brazil The Central Banks of Brazil’s use the key rates to implement monetary policy. First change that have taken place since 18th June 2020, interest rates are lowered by 0.25 percentage points to 2.25%. In the latest time, Brazil has lowered its interest rates by 0.25 percentage points, from 2.25% to an annual rate of 2%. Decreased in interest rates offset price declines, or possible deflationary conditions. This reduction hence, stimulate the economic growth, as lower financing costs can drive lending and investment.

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The monetary policy transmission mechanisms are the channels through which changes in the Selic rate, the main monetary policy instrument available and controlled by the Central Bank (BC), affect the behavior of other economic variables, mainly prices and output. Selic rate basically is the basic interest rate used in Brazil’s economy. It influences all interest rates in the country, such as interest rates on loans, financing and financial investments. In terms of monetary policy, the prices of the economy influenced in the decision between consumption and investment by families and companies, the exchange rate, credit, and expectations. Firstly, the decision between consumption and investment by families and companies is the most well-known channel in monetary policy. When the Selic rate goes up, real interest rates also tend to go up. When the real interest rate increases, there is a decrease in investments by companies and consumption by families which turns out a reduction in the demand for goods and services in the economy, contributing to reduce inflation. Secondly, the exchange rate. It is also an important channel for transmitting monetary policy, mainly in open economies. When the interest rate rises, the domestic currency tends to appreciate (the dollar is cheaper against the Real). Appreciation is directly linked to demand. If the value appreciates (or goes up), demand for the currency also rises. Currencies appreciate against each other for a variety of reasons, including government policy, interest rates, trade balances, and business cycles. The impact here causes a decrease in the price level of internationally tradable goods when expressed in national currency. The third channel of transmission of monetary policy is the credit channel. Encouraged by the central bank, when raising the interest rate, the rate charged for bank loans also increases, and this will decrease the volume of loans to individuals and companies, discouraging consumption, and investment. Last but not least, monetary policy also operates through expectations. Central bank will take action when there are changes in the interest rate which can change expectations about the evolution of the economy. For instance, by raising the Selic to restrain pressures towards inflation, the central bank signals accommodate various level of activities not only in the present but also for the future. Hence, families and companies come to believe that inflation, in the future, will be lower. As a result, prices set today will not rise sharply again. This is because agents know that future economic conditions no longer support higher prices and can cause losses to them.

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3.0 Conclusion Overall, inflation is a common economy problem experienced by all countries. Inflation is good when it is mild. The optimal inflation rate is often considered to be around 2%. In Brazil, due to the lack of trade, the inflation occurred which leads to the stronger react of price to internal supply shocks. The country control and reduce inflation from fiscal policy and monetary policy. In terms of monetary policy, Brazil implemented the decision between consumption and investment by families and companies, the exchange rate, credit, and expectations to influence the prices in the economy. All these ways implemented by the Central Bank work well to reduce inflation in the country. It is because raising interest rates is generally quite efficient in terms of reducing inflationary pressures. While in term of fiscal policy, the government of Brazil plan to stimulate the economy by lessening public investment in the “Development Acceleration Program” by providing tax breaks for organizations and purchaser and broadened tax reduction for local vehicle makers along with a reduction in government spending. This plan, however, is quite difficult to achieve because it is hard for them to cut public spending due to political reasons. As a result, they depended on monetary policy for the finetuning of the economy. However, there are other plans to reduce inflation such as in terms of monetary policy, the central bank can use open market operation. An open market operation can be conducted by purchasing and selling of government securities and treasury bills by Central Bank in open organized markets. Commercial banks and financial institutions should be pressured by the Central Bank to purchase securities that can minimize their money supply and then decrease their ability to offer loans. Reducing the supply of loans means reducing the influx of money in the market. Next, by using the statutory reserve ratio. Statutory reserve ratio means the instrument that required all banking institutions to keep cash deposit with the Central Bank that will increase the reserve of the commercial banks. The Central Bank

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should control the inflation by increase the reserve ratio to reduce the amount of fund banks have to lend. By doing so, it will also reduce the supply of money in the market and helps to reduce the purchasing power of consumers.

4.0 References

1.

https://www.sciencedirect.com/science/article/pii/S1062976916300527

2.

https://www.bcb.gov.br/controleinflacao/transmissaopoliticamonetaria

3.

https://countryeconomy.com/key-rates/brazil#:~:text=Interest%20rates%20fall %20in%20Brazil,Banks%20to%20implement%20monetary%20policy.

4.