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The Central Bank continues to lower
interest rates, as inflation remains below the target and the strong real
is keeping import prices down. However, the speed of the rate cuts may
slow, as inflation has been accelerating steadily in the past months and
monetary authorities anticipate price pressures to pick up in the coming
months, amid an increasingly buoyant domestic demand. Meanwhile, the
outlook continues to improve, with industrial production expanding at the
fastest pace in over two years. |
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Industrial production grows at fastest clip in more than two years
In July, industrial production increased 6.8% over the same
month last year, which was above the 6.6% expansion registered the
previous month and came in virtually in line with market expectations,
which had industry rising 6.7% annually. The July reading marks the
highest year-on-year growth since December 2004. The monthly acceleration
was driven by quicker growth in machinery and equipment as well as in
chemical products. Nevertheless, the seasonally adjusted index does not
corroborate the acceleration exhibited in July, as industrial production
declined 0.38% over the previous month. Owing to the positive monthly
figure, the annual average growth rate of industrial production rose from
3.9% in June to 4.2%, the fastest pace in almost two years.
Consensus Forecast
participants expect industry to accelerate further in the coming months,
with full year growth reaching 4.5%, which is up 0.2 percentage points
from last month’s projection. Next year, the pace of expansion in
industrial output is likely to moderate slightly to 4.4%.
Outlook continues to
improve
After expanding at a
strong pace in the first quarter, the outlook for the Brazilian economy
continues to point upwards, with industrial production accelerating in the
second quarter of the year. In the first quarter, the Central Bank
continuously cut interest rates, which helped to bolster domestic demand.
The strong backdrop and the favourable interest rate environment are also
boosting business confidence. In August, the business confidence index (ICI)
reached a new historic high for the second consecutive month inching up
from 121.7 points in July to 121.8. Thus, business confidence remains
well above the 100-point threshold that marks the division between
optimism and pessimism. The new historic high suggests that investment
will accelerate in the coming months. In addition, the consumer
confidence index (ICC) rose from 108.2 points in July to 109.3, indicating
that consumers continue to be optimistic and private consumption is likely
to remain strong in the remainder of the year. Furthermore, on the
external side of the economy, the strong real does not seem to be
hurting exports, which reached a record US$ 15.1 billion in August.
Meanwhile, international rating agency Moody’s raised the Brazil’s credit
rating to Ba1 - one level below investment grade - as the country used
record export revenues to pay foreign debt and increase international
reserves. Central Bank president Henrique Meirelles recently stated that
the economy is on track to meet the Bank’s 4.7% growth estimate for this
year. Consensus
Forecast participants share the Central Bank’s view and anticipate the
economy will grow 4.6% in 2007, which is up 0.7 percentage points from
last month’s figure. Next year, the pace of economic activity should
decelerate slightly with growth reaching 4.3%, which is unchanged from
last month’s estimate.
Central Bank cuts rates at slower pace
In August, consumer prices rose 0.47% over the previous month,
which almost doubled the 0.24% increase registered in July. The reading
came in line with market expectations, which had prices adding 0.46%.
Higher prices for food and beverages - which increased 1.39% over July -
as well as for communications were the main drivers behind the monthly
acceleration. As a result of the August reading, annual headline
inflation jumped from 3.7% in July to 4.2%. At the current level, the
inflation rate remains below the Central Bank’s target of 4.5% but within
the Bank’s 2.5% tolerance margin around the target rate. As anticipated,
on 5 September, the Central Bank decided to reduce its benchmark SELIC
target interest rate by 25 basis points to 11.25%. The rate cut
represents the 18th time since September 2005 that monetary
authorities have lowered rates, and, as a result, interest rates have
reached a historic low. The rate cut, however, is the smallest of the
last three meetings, as the Central Bank is concerned that higher
food prices may cause inflation to accelerate. The Bank stated that given
the current macroeconomic circumstances, the additional monetary stimulus
was justified and that it will monitor the evolution of the economic
situation carefully until the next meeting to define the next steps in its
monetary policy. Given rising headline consumer prices against a backdrop
of strong domestic demand and a temporary end of the currency appreciation
amid the protracted global market turbulences, the Central Bank is likely
to slow the pace of interest rate cuts in the coming months. Consensus
Forecast participants expect inflation to moderate and close the year at
3.7%, which is up 0.1 percentage points from last month’s forecast. For
next year, Consensus Forecast participants expect inflation to accelerate
slightly to 3.9%. |
