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Brazil:  Central Bank Raises Inflation Forecast
On 30 March, the Central Bank raised its inflation forecast for this year from 3.9% to 4.8%.  Officials based their decision on concerns over the higher than expected inflation in the first two months of the year, robust domestic demand and the effects of the current exchange rate depreciation on domestic prices.  The adjustment undermines the credibility gained via the recent interest rate hike and raises doubts over the Central Bank’s commitment to monetary discipline.
Economic Briefing April 2001                                                                              Archive

Economy on healthy path.  On 30 March, the National Statistical Institute (IBGE) released revised gross domestic product (GDP) figures for last year.  The new data show that the economy grew 4.5% in 2000, up from 4.2% previously reported.  More recent data releases indicate that the positive growth trajectory will persist in the first quarter of this year.  According to the Fundacação Instituto de Pesquisas Econômicas (FIPE), the seasonally adjusted monthly indicator of economic activity (IMEC), which monitors economic activity in São Paulo, was up 6.5% in February over February 2000.  The FIPE data also show that lower national unemployment (6.4% in February) combined with increased domestic credit availability appears to be driving strong growth in consumption.  In fact, the key consumption-related indicator of the IMEC increased 17.3%, while electricity consumption grew 6.7% over February last year.  Furthermore, the Retail Association of São Paulo (ACSP, Associação Comercial do Estado de São Paulo) reports that retail sales as measured by debit card payments continued to accelerate in March, with sales up 10.4% over March last year.  

In addition, according to IBGE, seasonally adjusted industrial production grew 8.0% in January over the same month last year.  Brazilian firms continue to expand their investment activities as evidenced by a 20.1% growth in capital goods production over the same month last year, which compares to a 6.2% and 6.9% expansion in consumer and intermediate goods output respectively.  The strong industrial output growth was propelled principally by the production of electrical, mechanical and transport equipment.  February trade data further confirm the pickup in investment, with annual capital goods imports up 5.5% over the same month last year.

According to this month’s Consensus Forecast, the economy is expected to continue to register strong growth rates in the next three quarters.  Nevertheless, growth will moderate slightly towards the end of the year due to the higher comparison base in 2000 and concerns are mounting among panellists about the growing trade balance deficit and the potential spillover effects on the currency, inflation and interest rates of the current Argentina crisis.  Therefore, even though current economic developments and the growth outlook in general remain favourable, the annual Consensus Forecast for GDP growth both this and next year was revised downward.  As a result, this year’s forecast remains below the government’s projection of 4.5% growth.

Currency volatility raises concerns.  Concerns about the Argentina crisis spilled over to other economies in the region last month.  In Brazil, the effect was felt principally through increased volatility in the real, which depreciated by 5.4% in March to 2.16 real to the US$, the lowest level since March 1999.  In early April, the real remained stable closing at 2.16 real to the US$ on 6 April.  The recent weakening of the real has brought the rate of depreciation this year to 10.7%.  The real weakness this year has prompted several revisions to the Consensus Forecast since the January edition.  The current volatility is likely to subside as Argentina related jitters ease, with the currency appreciating again towards the end of the year.

Central Bank raises interest rates.  Concerns about the potential pass-through of accelerated currency depreciation to domestic prices prompted the Central Bank to raise the benchmark SELIC interest rates 50 basis points to 15.75% on 21 March.  The monetary tightening represents the first increase in interest rates since March 1999 and was intended to raise credibility of the Central Bank’s monetary policy.  Assuming that the current Argentina-induced currency pressures subside, higher interest rates should serve to remove other factors driving the current real depreciation most notably direct price pressures associated with the up-tick in economic activity and the deterioration in external balances, which would be forestalled by a decline in demand in imports.


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