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Inflation rises and further pressures persist
In April, IBGE reported that the mid-April consumer price index (IBGE-IPCA
15), which covers monthly price increases up to the 15th of every month,
rose 1.14% over March – unchanged from the previous month and in line with
market expectations. The annual inflation rate rose from 16.0% in March to
16.4% in April. Accumulated inflation for the first four months is now at
6.6%, which is not far off from the Central Bank’s annual inflation target
of 8.5% for this year. The current price pressures continue to reflect
adjustments to last year’s currency weakening and fuel price adjustments
in the first months of the year. Monetary authorities believe that
seasonal pressures on prices will recede. Furthermore, when combined with
the moderation in economic activity induced by decreasing real wages and
tighter credit conditions, the absence of seasonal effects should help
lower inflation. Finally, the recent strengthening in the exchange rate
should also serve to further ease price pressures. However, participants
still remain pessimistic about the Central Bank’s ability to meet its
inflation target for this year.
Central
Bank keeps monetary reins tight
The persistence of inflationary pressures prompted monetary authorities to
keep the benchmark SELIC interest rate at a three year high of 26.5%.
However, the recent appreciation in the currency and the recent slowdown
in consumption are likely to prompt monetary authorities to adopt a more
accommodating monetary policy in the coming months. In fact, participants
expect interest rates to drop by the end of the second quarter and to come
down gradually by the end of the year.
Government moves ahead on structural reform
On 16 April, the Lula administration won the support of all 27 state
governors for the government’s tax and social security reforms, which were
sent to Congress at the end of April. The social security proposal would
levy taxes on retired civil servants, cap private and public sector
employees’ pensions, create complementary private retirement funds, raise
the retirement age, change state retirement benefits for existing public
employees and alter share of pension benefits for widows of retired public
servants. As it now stands, the social security reform would save the
government some 56 billion reais (US$ 18 billion) over the next 30 years
and eliminate the persistent pension system deficit, which is currently
estimated at 5.5% of GDP.
The tax reform is expected to improve tax collection and greater
transparency in the Brazilian tax regime. The government hopes to unify
the existing value-added tax code for goods and services (ICMS, Imposto
sobre Operações Relativas à Circulação de Mercadorias e sobre Serviços)
under a single charge, convert the current 0.38% temporary financial
transactions tax (CPMF, Contribução Provisória sobre Movimentação
Financeira) into a permanent but gradually lower tax, change the current
corporate social security contributions from a payroll to a value-added
basis and transform the current federal property tax on rural land to a
state tax with half the revenues targeted at municipalities.
The government’s reform proposals, which will require a constitutional
amendment in the case of social security changes, are considered essential
for longer term fiscal stability, a key ingredient to lowering risk
perceptions for Brazil. However, approval in the legislature is far from
certain and the government’s proposal is likely to undergo changes to
garner support from disparate coalition parties. |
