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Consumer
prices continue on upward trend
In July, the consumer price index (IBGE-IPCA 15), which covers monthly
price increases up to the 15th of every month, increased 0.93%. The
July figure was well ahead of the 0.56% increase observed in the prior
month. Rising food prices resulting from the inter-harvest period
and pronounced increases in electric energy tariffs accounted for the
strong July reading. Electricity tariffs rose 0.67%, which virtually
doubled the rate observed the prior month, while food prices were up 0.90%
over the prior month. The July price increase raised the annual
inflation rate from 5.4% in June to 6.5% in July. As a result, the
annual inflation is now well above the Central Bank’s 5.5% inflation
target for this year. Consensus Forecast participants expect the
acceleration in economic activity, rising fuel prices and higher currency
depreciation to feed through to higher inflation this year. As a
result, annual inflation is anticipated to reach 7.0%. This
month’s figure was revised upward by 0.3 percentage points over last
month, amid the rising inflationary expectations. Thus, the
likelihood that monetary authorities overshoot the target for the fourth
consecutive year is considered probable. This month’s forecast,
however, still is within the +/- 2.5% tolerance margin set by the Central
Bank. Panellists also anticipate that monetary authorities will
overshoot the annual inflation target next year, as the 5.7% Consensus
Forecast estimate is on the upper end of the +/- 2.5% range around the
central target of 4.5% set for 2005.
Central
Bank holds rates steady and voices concerns about inflation
Following its monthly monetary policy meeting on 21 July, the Central Bank
decided to maintain the benchmark SELIC interest rate unchanged at 16.0%.
The July move represented the third consecutive month that monetary
authorities have decided to maintain interest rates at their current
levels. However, for the first time in several months the Central
Bank indicated that interest rates could rise if the current inflation
trend persists. Consensus Forecast participants, however, still
believe that officials will cut interest rates further this year to
bolster the economic recovery. As a result, the SELIC rate is seen
dropping to 15.2% by the end of this year, which is up 0.3 percentage
points from last month’s forecast. Lower inflation next year
should enable monetary authorities to lower the SELIC rate further to
13.9%. This month’s interest rate estimate was revised upward 0.6
percentage points amid lingering concerns that authorities may be forced
to maintain tighter monetary policy, as activity remains robust and
inflationary pressures persist.
IMF
fiscal
target surpassed in first half of year
The public sector registered a fiscal surplus of 46.2 billion reais (US$
15.5 billion or 5.8% of GDP) in the first half of this year, which was
well ahead of the 32.6 billion reais (US$ 10.9 billion) fiscal surplus
agreed to with the International Monetary Fund (IMF) under the terms of
the US$ 40.1 billion stand-by agreement. The first half figure puts
public accounts on track to meeting the fiscal surplus of 71.5 billion
reais (4.25% of GDP) figure for this year. Rising tax income and
government imposed spending cuts significantly bolstered public accounts.
As a result, the nominal public sector deficit dropped to 3.8% of GDP from
4.1% of GDP in May. Consensus Forecast participants are confident
that the government will maintain the current fiscal discipline, as the
fiscal deficit is seen as narrowing further to reach 3.0% of GDP by the
end of the year, as the acceleration in economic growth is likely to help
bolster tax proceeds further. This month’s figure was revised
downward from the 3.2% of GDP estimate last month. Next year, the
fiscal deficit is anticipated to narrow further to 2.2% of GDP – down
0.2 percentage points from last month. |
