Research Dept. News
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Monthly Report, num 335 - May 2010
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International review - Brazil
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Brazil: an imminent rise
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Brazil's Central Bank makes its move to keep inflationary surges in check.
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As expected, Brazil's Monetary Policy Committee raised the reference rate at its meeting on 27 and 28 April. Although most analysts expected a rise of 50 basis points in the SELIC rate, it was actually raised by 75 points. In any case, the Brazilian monetary authority, led by Henrique Meirelles, who recently opted to remain at the head of the Central Bank, has earned e reputation of economic orthodoxy. This therefore augurs a firm reaction to the marked inflationary upswing.
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Temporary effects and the recovery push the rate of inflation up to 5.2% in March, much higher than the target set.
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Throughout 2009, inflation was contained thanks to the wide output gap and weak commodity prices, but the 2010 panorama is very different. Adverse weather conditions, the annual rise in public tariffs and the lively Brazilian recovery all pushed inflation up to 5.2% in March. Part of this increase is expected to be temporary: on the one hand, the smaller crops due to strong rains is seasonal; on the other, the annual rise in transport and education prices will dissipate over time. However, even after these effects have been adjusted for, the inflationary pressures are evident in some sectors such as construction and household goods and, although the rate of inflation may soon stabilize, it is expected to do so far above the target set (4.5%).
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The latest business data in Brazil support this suspicion, pointing to an economy in expansion that is very close to the full utilization of its production capacity. In March, the utilization of this capacity reached 83.5% and leading indicators suggest that this will go on rising. In spite of a moderate decline, the confidence of Brazilian consumers in their economy remained at historically high levels, as with credit, which continued to grow in February (1.5% year-on-year). This, and the good performance by the labour market with an unemployment rate that continues to fall (11.7% in January), explain the positive tone of retail sales that revealed surprising gains in February, up 12% year-on-year, once again confirming the strength of domestic spending. A strength that has been passed on to supply, with further rises year-on-year in double figures, both for industrial production (16% in February) and automobile sales (18% in March). The purchasing managers' index (PMI), in spite of a slight fall in March, continues to point towards strong expansion.
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Domestic demand continues firm and appears able to withstand the withdrawal of fiscal stimuli.
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While domestic demand remains strong, foreign demand has not been able to slow up the drop in the trade balance. The renewed upswing in the real over the last few weeks has not helped the adjustment. Overall, the main requirement is to avoid the excessive overheating of an economy that, moreover, is not considering any far-reaching fiscal adjustment until at least after the elections in October.
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