|
Inflation
above target amid strong growth
In November, the consumer prices increased 0.69%. The November
figure was more than double the 0.32% increase observed in the prior month
but was smack on target with Consensus Forecast expectations of 0.69%.
A pronounced increase in communications costs and higher transportation
prices associated with rising oil prices provided the lion share of the
consumer prices increase in November. As a result of the November
reading, the annual inflation rate rose from 6.8% in October to 7.2%.
Annual inflation, therefore, is now well ahead of the Central Bank’s
central target of 5.5% for this year but remains within the +/- 2.5%
tolerance margin. Heightened economic activity will exert additional
upward pressure on prices in the last month of the year. Thus,
Consensus Forecast participants expect the annual inflation rate to rise
further to 7.3%, which is unchanged from last month’s Consensus Forecast
figure. Next year’s Consensus Forecast panellists revised their
inflation estimate for 2005 downward by 0.1 percentage point from last
month to 5.8%, which remains on the upper end of the +/- 2.5% range around
the central target of 4.5% set for 2005.
Interest
rates rise amid Central Bank inflation concerns
In its 17 November meeting, the monetary policy committee of the Central
Bank (COPOM) decided to raise the benchmark SELIC interest rate from
16.75% to 17.25%. The November move continued the tightening trend
observed since September, which has brought the SELIC rate up 100 basis
points. Central Bank authorities believe that inflationary pressures
are unlikely to subside, amid heightened economic activity and rising oil
prices. Consensus Forecast participants have factored the Central
Bank’s tighter monetary policy into this month’s interest rate
forecast, which sees the SELIC rate rising further in December to 17.1%,
which is up from 16.7% in last month’s Consensus Forecast. Next
year, a more propitious inflationary setting is likely to emerge and
should enable monetary authorities to ease the reins. As a result,
Consensus Forecast participants see the SELIC rate dropping to 15.7% in
2005.
Central
Bank intervenes to counteract currency appreciation
In November, the currency appreciated 4.6% in nominal terms to reach 2.74
reais to the US$. The November reading continued a virtually
unabated currency appreciation initiated in June of this year. As a
result of the appreciation, the currency is now 5.4% stronger than at the
end of last year. The current strengthening of the exchange rate
reflects a generalized increase in investor confidence in emerging market
assets and the accelerated weakening of the US$ in international markets.
Government concerns that a persistence of the current appreciation in the
could forestall the strong rebound in the export sector, prompted the
Central Bank to intervene in exchange rate markets on 6 December – the
first active selling of reais in currency markets since February of this
year. The Central Bank intervention is part of a government plan
announced in late November to purchase US$ 3 billion in the spot market
through June of next year to pay down foreign debt and raise international
reserve levels. Consensus Forecast participants expect the currency
to depreciate notably in the final month of the year to close at 2.88
reais to the US$ - a 0.4% nominal annual nominal appreciation. Next
year, the currency is anticipated to weaken by 5.2% to close the year at
3.04 reais to the US$. |
