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The government is well on target to meet
its fiscal commitments agreed to with the IMF under the current stand-by
agreement. In addition, authorities have made significant inroads on
structural reforms sought by the multilateral institution. Meanwhile, some
sectors of the economy are showing signs of a nascent recovery but the
full impact of lower interest rates on domestic demand is unlikely to be
felt before next year. |
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Fiscal
balances remain on target and new IMF accord in making
In the third quarter, the government again exceeded its primary fiscal
surplus target agreed to with the International Monetary Fund (IMF).
According to the Central Bank, the primary fiscal surplus reached 57.1
billion reais (5.1% of GDP) in the January-September period. The figure
was well above the 54.2 billion reais target agreed to with the
International Monetary Fund (IMF).
The government is likely to agree to a new stand-by accord with the IMF in
mid-November. The current US$ 30.0 billion stand-by agreement expires at
the end of this year. Authorities are expected to request a one year
programme of US$ 14.0 billion. The fiscal and monetary policy continuity
of the current administration and progress on structural reform has
prompted questions as to whether the Brazilian government will seek a new
accord for 2005. Nevertheless, a new agreement for next year is likely to
serve as an important boost to investor confidence and will provide the
government with a necessary insurance to consolidate the current reform
progress.
Inflationary pressures easing but central target out of reach
In October, the National Statistical Institute (IBGE) reported that
consumer prices rose 0.29% – down from the 0.78% increase in the previous
month but in line with market expectations. Thus, the annual inflation
rate dropped from 15.1% in September to 13.9% in October. The moderation
in inflation observed over the past six months reflects the deceleration
in economic activity and the strengthening exchange rate, which is likely
to reduce inflation further by the end of the year. Nevertheless,
inflation still remains well ahead of the 8.5% year-end Central Bank
inflation target but is above the +/- 2.5% tolerance margin set for annual
inflation. Consensus participants remain sceptical about the Central
Bank’s ability to meet its target but see annual inflation dropping to
within the band at 9.5% by year-end. Next year, inflation is expected to
moderate further, with participants anticipating year-end inflation to
reach 6.5%, which is 0.2 percentage points below last month’s forecast but
exceeds monetary officials’ central target rate of 5.5%. Similar to this
year’s figure, the Consensus estimate is still within the +/- 2.5%
tolerance.
Central
Bank eases monetary reins further
The easing of inflationary pressures and a lack of a strong rebound in
economic activity prompted monetary authorities to lower the benchmark
SELIC interest rate again on 22 October, this time by 100 basis points to
19.0%. The October Central Bank move represented the fifth consecutive
downward adjustment to the SELIC rate, which is now 600 basis points below
its level at the end of last year. If the currency appreciation trend and
subdued economic activity persists, monetary authorities are likely to
maintain the more accommodating monetary policy in the coming months. In
fact, Consensus Forecast participants anticipate interest rates to drop
further to reach 17.6% by the end of the year, which is down 0.7
percentage points from last month’s forecast. Despite the likelihood that
the pick up in economic activity will exert pressures on consumer prices
next year, participants see the SELIC rate declining further throughout
2004 to reach 14.8% by year-end, which is down 0.2 percentage points from
last month.
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