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Improved inflation
prospects promise to lower interest rates
According to IBGE, consumer prices rose 0.5%
in January, which was on target with the 0.5% expected by the Consensus.
The January price lowered the annual inflation rate moderately from 7.67%
in December to 7.62%. The current rate remains well above the Central
Bank’s target of 3.5% with a margin of error of plus or minus two
percentage points. Nevertheless, Central Bank officials expect prices to
develop more favourably this year than last, when Argentina contagion
prompted substantial currency depreciation and administered prices
experienced upward pressure as a result of higher oil and electricity
prices. The overshooting of last year’s inflation target has kept
monetary authorities cautious on beginning to lower the benchmark SELIC
interest rate before the crisis in Argentina starts to ease and exchange
rate stability is more firmly established. In January, the real lost
ground as concerns about a more prolonged crisis in Argentina spill over
to Brazilian financial markets. As a result, the currency depreciated
4.0% in nominal terms since the end of December to close at 2.41 reais to
the US$. In its 23 January meeting, the Central Bank board decided to
leave the benchmark rate unchanged at 19% for the sixth consecutive
month. Participants anticipate interest rates to come down gradually this
year with the Central Bank shifting from its current neutral stance to a
policy of monetary easing in the first quarter. As a result, the
benchmark rate is anticipated to drop in the
first quarter and to be lowered further by year-end.
Solid fiscal performance
sustained
According to Central Bank data, the primary non-financial public sector
surplus reached 43.7 billion reais (3.75% of GDP) in 2001, which exceeded
the 3.5% of GDP fiscal target set with the International Monetary Fund
(IMF) under the auspices of the US$ 15.2 billion stand-by agreement of
September 2001. The government’s fiscal stringency was particularly
laudable given the downside effects experienced on tax revenues as a
result of lower economic activity and increased public investment in the
electricity sector. The improvement in fiscal management can be
attributed to the Fiscal Responsibility Law, which entered into force in
May 2000 and forces the Ministry of Finance and sub-national governments
alike to adjust spending if fiscal targets are not met. The nominal
fiscal deficit target, which includes interest expenditures and
incorporates exchange rate variations accrued over the stock of public
securities pegged to the exchange rate, reached 5.3% of GDP. The
Consensus figure for this year reflects optimism that currency stability
and the economic rebound will serve to buffer any adverse effects of the
October national electoral cycle on this year’s fiscal balances.
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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