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Improved inflation prospects as oil induced pressures subside and exchange
rate stabilizes
The mid-May consumer price index (IBGE-IPCA 15), which covers monthly
price increases up to the 15th of every month, increased 0.4% over May,
down from the 0.8% price rise in April. The mid-May figure lowered the
annual inflation rate from 7.8% in April to 7.7% in May. Consensus
participants expect consumer prices for the month of May to have increased
0.4%, which would maintain the annual inflation rate at 8.0%. Nevertheless,
participants highlight that oil prices have begun to come down to levels
observed earlier this year. In fact, the average price of the barrel of
West Texas Intermediate (WTI) of US$ 23.56 per barrel through May remains
17.0% below the average for the same period last year. In addition, the
pass-through of the accelerated depreciation in the currency to non-fuel
prices experienced last year is beginning to moderate. Participants expect
the accelerated pace of inflation, observed since the beginning of the
year, to moderate in the second half of the year.
Interest rates expected to drop amid more favourable inflation setting
Prospects for an improved inflationary setting are beginning to emerge.
However, Central Bank easing is likely to be conditioned by oil price and
currency movements. Since the beginning of the year, the Central Bank has
maintained a neutral stance on monetary policy, preferring to maintain
interest rates at current levels as warranted by fuel-induced price
pressures. In its 21 May meeting, the Central Bank board again decided to
keep the benchmark SELIC interest rate unchanged at 18.5% - for the third
month in a row. Both of the aforementioned factors may influence the
current inflationary environment and are subject to volatility. The rising
oil price trend appears to have been temporarily halted as Middle East
tensions are not escalating beyond the expected but increased US energy
demand may prompt another upward bout. Furthermore, the currency may
experience increased volatility in the face of the October nationwide
elections near. Nevertheless, participants are optimistic that the less
than propitious growth trajectory is likely to buffer inflationary
pressures and may prompt the Central Bank to ease monetary policy by 25
basis points in its June meeting. Furthermore, the panellists expect the
perceived improved inflationary environment to encourage the Central Bank
to lower rates further in the second half of the year.
Current
account deficit continues to narrow
The current account balance registered a deficit of US$ 2.0 billion in
April. The April figure continued to lower the annual current account
deficit, which is down from US$ 26.3 billion for the same month last year
to US$ 19.3 billion. The April reading brought the current account deficit
to its lowest level observed since October 1996. The improvement can be
attributed principally to the reversion of the trade balance from a
deficit of US$ 1.4 billion in April 2001 to a US$ 4.7 billion surplus, as
imports withered due to weaker domestic demand. Even though the capital
account surplus narrowed from US$ 28.5 billion in April last year, the US$
21.4 billion surplus in April was sufficient to cover the current account
deficit. The capital account deterioration was mainly driven by lower
direct investment inflows.
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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