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Exchange rate stabilizing. The Real
continued to lose ground in October but at a more moderate pace than
observed in the past six months. In October, the currency depreciated
1.4% nominally, which was down from the 4.7% and 4.4% losses experienced
in August and September respectively. In early November, however, the
Real showed remarkable resilience and even appreciated by 6.8%, closing at
2.53 to the US$ on 9 November. Nevertheless, panellists have again
revised year-end exchange rate forecasts, as evidence mounts that the
depreciation experienced so far this year was not a mere overshooting but
is a more permanent adjustment in the exchange rate.
Inflation moderating due to slowdown but remains
above target. Key to this year’s uptick in consumer prices has
been the inflationary pass-through resulting from the deteriorating
currency. The National Statistical Institute (IBGE) IBGE-IPCA index
increased 0.14% in October down from the 0.23% increase in September. The
mild October increase lowered the annual inflation rate to 6.65%. The
Consensus further indicates a high likelihood that price pressures will
abate in the last two months of the year but that, nevertheless, annual
inflation will reach 6.6% by year-end, which is well above the Central
Bank’s 6% target for this year. Even though the Central Bank remains
confident that next year’s 3.5% inflation target will be met, panellists
expect consumer prices to rise at a much higher rate.
Interest rates expected to remain at current
levels. The emerging slowdown in domestic and global demand
and lower oil prices are likely to limit further inflationary pressure and
should enable the Central Bank to avert further interest rate hikes for
the time being, assuming that the currency stabilizes. On 17 October, the
Central Bank board decided to maintain the benchmark SELIC at 19.0%, the
third consecutive month that rates have been kept at their existing
levels. Consensus Forecast participants anticipate rates to remain
unchanged through the end of the year and that the easing of inflationary
pressures next year as well as lower interest rates in the United States
will enable the Central Bank to loosen monetary reins somewhat and bring
down the SELIC rate by the end of 2002.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Brazil. For more details please click here.
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