Unconventional Wisdom- Jumping on the reflation bandwagon:: Macquarie Research,

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Unconventional Wisdom
Jumping on the reflation bandwagon
Event
 Policy stimulus is spreading beyond central bankers in developed economies.
Impact
 The surprise monetary easing in Brazil is only one example of the changed
mindset that is taking hold in policymakers around the world. Measures to
protect industry competitiveness are also being implemented.
 Individually, these policies may not make an enormous difference. But the
cumulative effect of these policies all pushing in a pro-growth direction cannot
be ignored.
 Any sign that the holdouts, China and the European Central Bank, are also
tempted to join the reflation bandwagon would put a fire under a range of
asset markets. So far the evidence for such a policy shift is really nonexistent.
But the rhetoric will need to be watched closely.
Analysis
 In one of the big surprises of 2011, the central bank of Brazil eased monetary
policy. The decision by COPOM to cut its target rate by 50bp to 12% still
leaves a very high interest rate structure by global standards. Nevertheless
the symbolism is important for markets outside Brazil.
 Macquarie’s Latin America analyst, John Welch, notes that this decision was
made despite an inflation rate over 7% when the target rate is 4.5%.
Furthermore there is still significant fiscal stimulus in the economy. It is also
worth remembering that Brazil has a massive investment pipeline because of
the football World Cup (2014), the Olympic Games (2016) and the huge
spending on the pre-salt oil deposits which makes the Australian LNG plans
look like chickenfeed.
 With this backdrop, even the weaker output data would normally not be
sufficient for any central bank to countenance lower interest rates. But there it
is.
 Most of the analysis will concentrate on likely further moves in Brazilian
monetary policy and what it all means for the credibility of the central bank.
Yet the implications are just as important for global monetary conditions and
global economic growth. If an important central bank is prepared to avert its
gaze from inflation, even if only temporarily, because it believes that the risks
to growth are more compelling then this is a powerful statement.
 Viewed from a distance it is understandable why there may be growth
concerns. After all, the Brazilian TWI in real terms (the real Real) has blasted
higher. It has left the A$ TWI for dead.