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Persistence of unfavourable inflation scenario …
The real depreciation last year and rising oil prices continue to be the
major drivers behind rising domestic prices. According to the National
Statistical Institute (IBGE), the December consumer price index (IBGE-IPCA),
rose 2.1% over November. The December figure came in almost a full
percentage point above the November figure, which had already represented
an annual high. As a result, annual inflation rose to 12.5% in December
from 10.9% in November, skyrocketing past the 6.0% Central Bank inflation
target for 2002. Consensus Forecast participants believe that the currency
shocks of last year have had a more permanent impact on inflation.
Furthermore, some observers fear that the incoming Lula administration’s
desire to rekindle the growth engine may prompt monetary authorities to
sacrifice inflationary targets in the shorter-term in favour of lower
interest rates. The current official Central Bank target for this year is
4% (+/- 2.5%) but the new Central Bank president has already stated his
desire to revise the targets to give monetary authorities a longer time
frame to lower inflation. Participants expect inflation to end the year at
more than twice the official Central Bank target, with annual inflation
anticipated to reach 11.1%, up 0.6 percentage points from last month’s
forecast.
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Prompts further monetary tightening
At the end of 2002, the real appreciation accelerated. In December, the
monthly appreciation in the currency reached 2.9% in nominal terms versus
the US$, which was up from the 0.2% appreciation in November and brought
the quarterly appreciation rate to 10.2%. As a result, the real closed the
year at 3.53 reais to the US$, stronger than the market had anticipated
only a month ago. Nevertheless, the annual nominal depreciation rate of
34.3% represented a significantly more pronounced deterioration in the
currency than expected at the beginning of the year. Continued Central
Bank concerns about the inflationary pass-through of the currency
depreciation, along with the possibility of a further deterioration in
inflationary expectations, rising inflation and improved prospects for a
pickup in economic activity this year, prompted the Central Bank monetary
policy committee (COPOM) to raise the benchmark SELIC interest rate by 3
points to 25.0% on 18 December. The December upward adjustment represented
the third consecutive interest rate hike and brought the SELIC rate 7
points above the levels observed at the end of the third quarter of 2002.
Participants anticipate the new monetary team at the Central Bank to
gradually lower interest rates this year with the SELIC dropping to 19.3%,
up 0.7 percentage points from last month.
Trade
surplus reaches 10-year high amid import slump
According to the Ministry of Industrial Development and Trade, the trade
surplus reached US$ 13.1 billion at the end of last year, which was up
from the US$ 2.7 billion surplus in 2001. The year-end figure was well
above market expectations and was the result of a strong contraction in
imports, which dropped 15.3% over 2001. Exports, on the other hand,
experienced moderate growth of 3.3%, further adding to the strengthening
of the surplus. Participants anticipate that exports will become the key
driving force behind a continued healthy trade balance this year, as
annual growth is expected to accelerate to 7.4%, which will be partially
offset by higher imports (+3.1%) resulting from a pickup in economic
activity. Therefore, the trade surplus is expected to widen further to US$
15.5 billion by the end of this year. |
