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The
economy may have exited the recession in the final months of last year.
The low interest rate setting, declining inflation, a stronger exchange
rate and declining unemployment are likely to provide a strong backdrop
for more pronounced economic growth this year. In addition, investor
confidence is likely to be fuelled by the government’s progress on
important structural reforms. |
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Currency
strengthens further at end of year
In
December, the currency appreciated 2.1% in nominal terms versus the US$
over the previous month, which resulted in a year-end exchange rate of
2.85 reais to the US$. The December strengthening raised the annual
appreciation to 22.3%. Last year’s rebound in the exchange rate
reflected not only a recovery in investor confidence about the Lula
administration’s commitment to economic policy continuity but also a
generalized rebound in international investor interest in emerging market
assets. In addition to the currency strengthening, the stock market
rebounded 94.3%, strongly bouncing back from the 17.0% drop in the prior
year. Similarly, the spread to U.S. Treasuries of the benchmark
composite J.P. Morgan EMBI+ Brazilian sovereign bond dropped to 983 basis
points from 1,446 basis points at the end of 2002, the lowest level
observed since 1998. Nevertheless, participants do not expect last
year’s currency strengthening trend to persist into 2004. In fact,
the currency is seen to depreciate 7.1% this year to 3.21 reais to the US$
by the end of this year.
Inflationary
pressures abate further but central target overshot
The
mid-December consumer price index (IBGE-IPCA 15), which covers monthly
price increases up to the 15th of every month, rose 0.46% over November.
The December data came in well above the 0.17% monthly increase observed
in November but confirmed the moderation in monthly price increases
observed throughout most of the year. As a result of the more benign
price developments observed in December, the annual inflation rate dropped
for the third consecutive month from 12.7% in November to 9.9% in December.
The year-end inflation figure was above the 9.3% Consensus figure of last
month and also was well above the Central Bank’s 8.5% year-end inflation
target. Nevertheless, the annual inflation rate was within the +/-
2.5% tolerance margin set for 2003. The anticipated pick-up in
economic activity this year and prospects for more accelerated currency
depreciation are likely to raise price pressures. However, year-end
inflation is expected to reach 6.2%, which is down 0.1 percentage points
from last month’s forecast. The Consensus figure exceeds monetary
officials’ central target rate of 5.5% but is still within the +/- 2.5%
tolerance margin.
Central
Bank lowers interest rate again amid moderation of inflation
Currency
stability and moderate economic growth served to bring down inflationary
pressures last year and gave the Central Bank substantial leeway to lower
interest rates. In its 17 December meeting, the Central Bank decided
to lower the benchmark SELIC rate for the seventh consecutive month, from
17.50% to 16.50%. Monetary authorities justified the monetary
loosening with continued optimism about an easing of inflationary
pressures. As a result, the SELIC rate closed the year 850 basis
points below the level registered at the end of 2002 and at the lowest
level observed since April 2001. Inflationary expectations this year
are likely to rise due to increased economic activity and accelerated
currency depreciation. Nevertheless, Consensus Forecast participants
believe that the Central Bank will have additional leverage to bring down
the SELIC rate to 14.4% by the end of this year, which is 0.1 percentage
point below last month.
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