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Brazil:  Growth Prospects Promising
Economic Briefing July 2000  

Economy proceeding favourably.  Key economic indicators suggest that the Brazilian economic expansion continues along a promising trajectory.  The National Statistical Institute (IBGE) reported that seasonally adjusted industrial production rose by 2.7% in May compared to the same month last year.  The May industrial data is a clear indication that companies are beginning to resume their investment activities.  Seasonally adjusted capital goods production expanded by 9.4% over the same month last year, followed by a more moderate performance in intermediate goods production of 4.1%.  The most notable expansion occurred in the production of durable consumer goods, which expanded 18.5% over May 1999. 

The National Index of Consumer Expectations elaborated by National Confederation of Brazilian Industry (CNI) showed that consumer confidence is recovering with the index rising 3.9% in May over the same month last year.  Even though unemployment dropped only marginally in May to 7.8% from a high of 8.2% in March, domestic credit availability and declining interest rates have positively affected consumption.  According to the Central Bank, seasonally adjusted real retail sales in the São Paulo metropolitan area grew 12.4% in April over the same month last year.  Durable consumer goods sales were up 21.4% for the same period, while automobile sales expanded 8.7%.

Inflation contained despite economic upturn.  While the upcoming government adjustments to controlled prices will be carefully scrutinized in the coming months, the July Consensus Forecast survey indicates that participants remain optimistic about the prospects that this year's International Monetary Fund inflation target of 6.0% will be met this year.  In May, consumer prices were flat (+0.01%) bringing the annual rate down to 5.3% from 5.4% in April. 

Central Bank lowers benchmark interest rate.  Stability in inflationary expectations for this year prompted the Central Bank Monetary Policy Committee (COPOM, Comité de Política Monetaria) to lower the benchmark overnight rate (SELIC) from 18.5% to 17.5%, in its June meeting.  This is the second rate cut this year.  Increased confidence that the US economic growth trajectory has been tamed sufficiently by Fed interest rate hikes, expectations that oil prices will remain contained as a result of the OPEC production expansion and favourable inflation numbers were the key drivers behind the decision to further lower interest rates.   

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