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Inflation
subdued but shadows lingering
The National Statistical Office (IBGE) reported that the mid-January
consumer price index (IBGE-IPCA 15), which covers monthly price increases
up to the 15th of every month, increased 0.68% over December. The
January figure came in above the 0.46% monthly increase observed in
December and was roughly on target with market expectations of 0.64%.
Nevertheless, the annual inflation rate continued to drop from 9.9% in
December to 8.5% in January.
The
Central Bank expects inflation to pick up in the first quarter of the year
as the result of a number of seasonal factors, including the beginning of
the new school year, the declining food stocks resulting from the
inter-harvest period and the likelihood that utility companies will hike
tariffs. Monetary authorities also voice concern that the
anticipated spike could represent a more permanent adaptation of inflation
to higher levels rather than a temporary phenomenon, as a recent survey by
of businesses nationwide also showed that 39% were considering price
increases in the first quarter of the year. Consensus Forecast
participants see the anticipated acceleration in the economy and increased
currency depreciation as exerting additional pressure on prices. The
currency, which depreciated 1.8% in nominal terms versus the US$ in
January, could come under some pressure this year if the U.S. Federal
Reserve decides to tighten the monetary reins. Despite the upside
pressure on prices Consensus Forecast panellists believe that inflation
will moderate by the end of this year reaching 6.2%, which is unchanged
from last month’s forecast. The Consensus figure still remains
above the Central Bank’s central target rate of 5.5% but is within the
+/- 2.5% tolerance margin. The Consensus Forecast estimate for next
year is 5.3%, which also remains well above the monetary authorities’
target of 4.5% but within the +/- 2.5% tolerance margin.
Central
Bank keeps monetary policy unchanged
The Central Bank’s concern about price developments in the first quarter
of the year prompted it’s monetary policy committee (COPOM) to keep the
benchmark SELIC interest rate at 16.5%. The January decision set an
end to seven consecutive cuts to the SELIC rate, which had brought down
the benchmark rate 10 percentage points to its lowest level observed since
April 2001. However, the mounting concern about the inflation
trajectory in the coming months and the pickup in consumption are likely
to prompt monetary authorities to refrain from further rate cuts for the
time being. The current Consensus Forecast figure indicates that
rates will be lowered moderately throughout the year but that the
aggressiveness of last year’s interest rate cuts is likely to moderate
significantly in 2004. In fact, Consensus Forecast panellists have
raised the interest rate forecast for this year by 30 basis points since
last month to 14.7%. Consensus Forecast panellists believe that
moderating inflation next year will give the Central Bank leeway to reduce
the benchmark interest rate further to 13.3%.
Government
beats IMF fiscal target
According to the Central Bank, the primary fiscal surplus, which excludes
government interest payments, reached 66.2 billion reais (US$ 22.6 billion
or 4.3% of GDP) in 2003. Last year’s surplus figure was well above
the 2002 figure of 52.4 billion reais (US$ 18.1 billion or 3.9% of GDP),
as the government stuck to strict fiscal discipline and began to adopt
important structural reforms. Furthermore, the fiscal surplus
exceeded the target agreed to with the International Monetary Fund (IMF)
under the terms current stand-by agreement. The nominal fiscal
deficit reached 5.2% of GDP, which was up from 4.6% of GDP the previous
year. The increased debt servicing burden reflects rising debt
issuance, as public debt increased from 55.5% of GDP in 2002 to 58.2% of
GDP last year. The government anticipates that the moderate currency
depreciation and declining interest rates will serve to stabilize the
public debt burden this year, which would lower the nominal fiscal deficit
to a projected 3.0% of GDP. The government’s figure is currently
on target with the Consensus Forecast estimate for this year, which also
sees the fiscal deficit at 3.0% of GDP.
Domestic
economy showing mild signs of recovery
Recent economic data indicate that the economy is beginning to recover,
with the Consensus expecting the growth to have entered positive territory
in the final quarter of last year (+1.2% year-on-year). In the third
quarter the economy had contracted 1.5%. Furthermore, growth is seen
as accelerating notably in the first quarter this year, with economic
activity rising 2.3% yoy.
According
to IBGE, industrial production increased 2.9% in December of last year
over December 2002. The December figure was an improvement over the
previous month, when output rose just 0.4% and represented the fourth
consecutive monthly increase. Furthermore, in seasonally adjusted
terms, industrial output actually expanded at a very robust 2.1% over
November, which was up from the already strong 1.6% increase observed in
September.
On
a sectoral basis, most sub-sectors experienced positive growth rates with
the exception of pharmaceuticals, clothing, beverages, plastics, non-metal
mining and textiles output. The strongest growth rates were observed
in furniture, electrical and mechanical equipment production.
Capital goods production dropped for the first month, following four
consecutive monthly increases in seasonally adjusted terms, as activity
declined 5.3%, following a 3.9% expansion in November.
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