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Weakening currency exerts upward pressure on prices
The accelerated real depreciation is beginning to pass through to domestic
prices. According to the National Statistical Office (IBGE), the
mid-September consumer price index (IBGE-IPCA 15), which encompasses
monthly price movements up to the 15th of every month, rose 0.6% over
August. The September figure was below the 1.0% increase in August but was
double the rate observed for the same period last year. As a result, the
annual inflation rate rose to 7.5% in September from 7.3% in the previous
month. The accumulated inflation rate for this year at 5.5% is now already
on par with the Central Bank’s target for this year. Consequently,
monetary authorities are expected to overshoot the inflation target for
this year. Even though panellists expect inflationary pressures to ease in
the final three months of the year, the annual inflation rate of 6.9%,
which is 0.5 percentage points above last month’s figure, is now also well
above the Central Bank’s target. Despite the moderation in currency
pressures next year, participants do not believe that inflationary
pressures will ease and have raised their forecast by 0.9 percentage
points since last month.
Doggedness of exchange rate likely to forestall substantial monetary
easing
In its 18 September meeting, the Central Bank decided to maintain the
benchmark SELIC rate unchanged at 18.0% for the third consecutive month.
Monetary authorities explained that the decision to hold rates steady
resulted from continued concerns about the inflationary effect of currency
depreciation and seasonal effects related to the harvest period, which
exerted upward pressures on food prices. Participants have revised their
interest rate forecast again this month, raising the projection for the
SELIC rate 0.3 percentage points. Nevertheless, participants anticipate
the Central Bank to be able to lower rates once the current
politically-induced currency volatility has subsided, which will bring
down the benchmark interest rate by the end of the year. Furthermore, the
easing of inflationary pressure will lower interest rate further next
year.
External accounts developing favourably amid widening of trade surplus
In September, the trade balance registered a surplus of US$ 2.5 billion,
the highest surplus ever registered in a month. According to the Ministry
of Industrial Development and Trade, exports were up 26.8% in September
over the same month last year and reached US$ 6.5 billion – a historical
monthly high. The strong September reading resulted from robust growth in
primary (soy products) and semi-manufactured goods (raw sugar, iron and
paper) exports, which rose 71.4% and 53.4% respectively over the same
month last year. Increased demand from Asia, where exports registered a
robust 116.6% pace, and the European Union (+28.9% yoy) accounted for the
strong boost, while sales to the United States rose a notch more
moderately (+28.0% yoy). Imports, in turn, declined 3.6% over the same
month last year. Import trends continued to reflect a more subdued
domestic economic environment, where demand is being stifled by a
deteriorating exchange rate and high interest rates. As a result of the
strong September export expansion, the annual trade surplus widened from
US$ 5.4 billion in August to US$ 7.9 billion.
The trend of higher trade surpluses observed since April 2001 was
reflected in August balance of payments data, which showed that the
current account registered a US$ 316 million surplus – the first surplus
observed since 1994. As a result, the annual current account deficit
narrowed further from US$ 16.6 billion in July to US$ 15.2 billion in
August. Annual foreign direct investment, which totalled US$ 18.3 billion
in August was more than sufficient to finance the current account
short-fall.
Participants expect the current export dynamism to persist through the end
of the year, as a more competitive exchange rate paves the way for more
sales abroad. In fact, the trade balance surplus is anticipated to widen
further through the end of the year. Acceleration in annual export growth
and a more moderate import expansion will serve to widen the trade surplus
further next year. As a result of favourable trade developments,
participants expect the current account deficit to narrow significantly
this year from US$ 23.2 billion in 2001 and the trend is expected to
persist into next year with the current account deficit diminishing
further.
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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