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Central
Bank eases monetary policy further amid subdued growth
On 17 September, the Central Bank decided to lower the benchmark SELIC
interest rate by 200 basis points to 20.0%. The September easing
represented the fourth consecutive cut in the SELIC rate, which has
dropped 650 basis points since May. Monetary officials cited the declining
trend in inflationary expectations observed in recent months and the
appreciation in the currency, along with optimism about continued fiscal
discipline and a more subdued economic setting, as key drivers behind the
decision to ease monetary policy. Authorities claim that the inter-harvest
period and readjustments of regulated prices are likely to put some
pressure on consumer prices in the coming months. Also, the price
increases earlier this year may feed through to higher wage adjustments at
the end of the year, which could exert some upward pressure on prices.
Nevertheless, the Central Bank is optimistic that inflation will remain
contained and continue to decline, as the inflationary pass through of
accelerated currency depreciation from last year is anticipated to have
come to an end and prices are expected to moderate, particularly amid the
less favourable economic setting. The Central Bank’s optimism over
continued deceleration in inflation this year is likely to be reflected in
monetary policy measures. In fact, Consensus participants see the
benchmark SELIC interest rate declining further from its current level to
18.3% by the end of the year, which is down 1.4 percentage points over
last month. In addition, the pick up in economic activity next year is not
anticipated to significantly accelerate inflation and should help the
Central Bank bring down interest rates further to 15.0%, which is down 0.6
percentage points from last month.
Inflation abates on growth slowdown and currency strengthening
In September, consumer prices rose 0.78%. The September figure exceeded
the 0.34% monthly increase observed in August and was above market
expectations of 0.60%. As a result, the annual inflation rate remained
unchanged over August at 15.1%. Wholesale prices, as measured by producer
price index (FGV-IPA-DI), experienced a 1.29% increase, reversing the
declining trend observed since April. Nevertheless, while the annual
wholesale price growth rate continued to drop from 25.9% in August to
22.8% in September, the figure remains well above the consumer price
variation. The current divergence in wholesale and consumer prices may, in
part, reflect wholesaler’s inability to transfer higher prices to
retailers amid subdued domestic demand. Furthermore, this year’s currency
strengthening is subduing inflationary pressures. In September, the
exchange rate appreciated 1.5% in nominal terms versus the US$, virtually
offsetting the 1.7% depreciation observed in the previous month. At 2.92
reais to the US$ at the end of September, the currency was 20.9% stronger
than at the end of last year. Inflation still remains at almost double the
8.5% year-end inflation target and the Consensus remains sceptical about
the Central Bank’s ability to meet its target, expecting 9.5% year-end
inflation. However, this month’s the annual Consensus inflation estimate
has been lowered for the fourth consecutive month and is now within the
+/- 2.5% tolerance margin set for the inflation target. Next year’s
inflation rate, which Consensus Forecast panellists see to reach 6.7%,
will also be above monetary officials’ central target rate of 5.5% but
just as foreseen for 2003, still within the +/- 2.5% tolerance.
Growth
pattern erratic and economic activity still subdued
Following the release of the sombre second quarter gross domestic product
(GDP) data, the Central Bank decided to lower the growth forecast for this
year to 0.6% from 1.5% officially expected before the revision on 30
September. According to the government, the combination of high interest
rates, deteriorating real incomes resulting from higher inflation, rising
unemployment and tight credit conditions drove the economy into recession
in the first half of the year. Even though the improved inflationary
setting observed at the beginning of the second half and the aggressive
lowering of interest rates should help spur on economic activity, growth
is unlikely to be sufficient to lift the economy to a more propitious
growth pace.
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