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Inflation moderates amid currency strengthening and paltry domestic
economic performance
In November, consumer prices rose 0.34%, which was up from the 0.29%
increase observed in October. Nevertheless, the annual inflation rate
dropped yet again to 11.0% from 14.0% in the previous month. The modest
performance of the economy and a strengthening exchange rate has lowered
inflationary pressures gradually this year. Furthermore, while
administered prices may exert some upward pressure on prices in the final
month of the year, the effect is likely to be offset by an expected
lowering of fuel prices. Nevertheless, annual inflation still remains well
above monetary authorities’ 8.5% year-end inflation target and the
Consensus expects the Central Bank to overshoot the target with a 9.3%
year-end inflation rate. This month, the annual Consensus inflation
forecast has been lowered for the sixth consecutive month and is within
the +/- 2.5% tolerance margin set for this year’s target. Next year,
inflation is seen to moderate further to 6.2%, which remains above
monetary officials’ central target rate of 5.5% but is still within the
+/- 2.5% tolerance margin.
Central
Bank eases further amid subdued economic setting and moderating inflation
On 19 November, the Central Bank monetary policy committee (COPOM) decided
to lower the benchmark SELIC interest rate by 150 basis points to 17.5%.
The cut was well above market expectations of 50 basis points. The
November move represented the sixth consecutive downward adjustment to the
SELIC rate, which is now at a level not observed since June 2001. Monetary
officials claimed that inflationary expectations remained moderate and
that prospects for a balanced recovery and a more favourable external
scenario were positive for continued price stability. Consensus Forecast
panellists have revised their interest rate forecast downward again this
month, expecting another cut to the SELIC rate in the upcoming 17 December
COPOM Meeting. The anticipated 50 basis point cut will bring the benchmark
rate to 17.0% by year-end, which is down 50 basis points from last month’s
forecast. Furthermore, despite the likelihood of a recovery in economic
activity next year, the easing of inflationary expectations and further
currency stability should help lower the SELIC rate further in 2004 to
14.5%.
Currency slips but further outlook for stability remains
In November, the currency depreciated 3.2% in nominal terms against the
US$, which represented a notable deterioration from the 2.4% appreciation
observed in the prior month. As a result, the real closed the month at
2.95 to the US$. The November weakening reflected market concerns that
about heightened foreign debt payments in both the private and public
sector. Participants do not expect the November reading to have set the
tone for a new trend in exchange rate movements. In fact, the currency is
seen as depreciating at a more moderate 1.8% pace in December and should
close the year at 3.00 reais to the US$ - a 18.0% appreciation over last
year. The government’s continued commitment to economic policy continuity
and progress on structural reforms will be the key behind currency
stability next year. Participants expect the currency to depreciate 7.0%
next year, which will bring the real to 3.22 reais to the US$ by year-end. |
