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Inflation continues on upward trend despite growth slowdown and current
strengthening
In May, the National Statistical Office (IBGE) reported that the mid-May
consumer price index (IBGE-IPCA 15), which covers monthly price increases
up to the 15th of every month, rose 0.85% over April. The May figure was
well below the 1.14% monthly increase observed in April. Nevertheless, the
annual inflation rate continued to rise from 16.4% in April to 16.9% in
May. The most recent data show that wholesale prices experienced their
lowest monthly increase in three years this past April. The benchmark
producer price index (FGV-IPA-DI) rose just 0.07% over the previous month.
As a result, the annual inflation rate dropped from 43.6% in March to
42.7% in April. The annual wholesale figure still remains well above the
consumer price variation. The current divergence in wholesale and consumer
prices may reflect wholesaler’s inability to transfer higher prices to
retailers amid the less favourable domestic economic setting, which
implies remaining inflationary pressures in the coming months. With
inflation bordering at twice the level of the 8.5% year-end inflation
target, the Consensus is sceptical about the Central Bank’s ability to
meet its target and expects 11.8% year-end inflation. Similarly, next
year’s inflation rate, which is seen to reach 7.6%, will be notably above
monetary officials’ objective of 5.5%. As a result, the leeway for
monetary easing is slim. Nevertheless, participants appear to expect that
the Central Bank will sacrifice monetary discipline to propel the economy
forward. In fact, the benchmark SELIC interest rate is seen dropping from
its current 26.5% to 21.6% by the end of the year.
External balances bolstered by healthy exports and slow import growth
In the first quarter, the current account registered a surplus of US$ 82
million compared to a US$ 265 million deficit recorded in the final
quarter of last year and the US$ 3.3 billion deficit registered in the
first quarter of 2002. The improvement of the current account was due
principally to the trade balance, which incurred a surplus of US$ 3.8
billion, compared to a US$ 1.0 billion surplus in the first quarter 2002.
Higher unilateral transfers also contributed to the improvement. The first
quarter increase in the trade surplus resulted from higher exports, which
rose 26.5% compared to the same quarter last year, spurred by the more
competitive exchange rate, while imports rose at a much more moderate 3.9%
pace for the same period. As a result, the annual current account deficit
declined to US$ 4.3 billion in the first quarter, down from a US$ 6.3
billion deficit in the fourth quarter.
The capital account registered a US$ 3.4 billion surplus in the first
quarter, which was up from the US$ 2.1 billion deficit observed in the
first quarter of last year. Increased portfolio investment flows and other
investments, which include trade credits, loans, currency and deposits,
other assets and liabilities as well as exceptional financing, accounted
for the lion share of the improvement, as net foreign direct investment
reached US$ 1.3 billion - only a third of the level registered in the
first quarter of last year.
Despite the likelihood that healthy export growth will continue to drive
up the trade balance surplus this year, participants do not anticipate
additional widening of the current account deficit in 2003, as the
year-end deficit is expected to reach US$ 4.2 billion, which is down from
the US$ 4.6 billion deficit in last month’s Consensus. |
