Research Dept. News
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Monthly Report, num 352 - December 2011
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International review - Brazil
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Brazil: the goal, a soft landing
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The tendency for Brazil's economy to slow up is consolidating.
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The slowdown in the Brazilian economy has intensified over the last few months and this has been particularly confirmed by business indicators, especially the marked fall in industrial production in September (-1.6% year-on-year). There are basically three reasons for this: the delayed impact of tougher economic policies implemented as from the beginning of 2011 to counteract the risk of overheating; the persistence of an overvalued real for a long period; and the recent deterioration in the world's growth prospects. Given this scenario, Brazil's economic authorities have turned around their economic policies in order to ensure a soft landing for an economy that managed to dodge the crisis at almost breakneck speed.
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Monetary policy is clearly countercyclical with interest rate cuts and more relaxed capital requirements for consumer credit.
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There is little room to manoeuvre on the fiscal flank, although a reduction in the tax on foreign investment in shares is being studied, as well as resorting again to quasi-fiscal stimuli via public banking. For the moment, however, the weight of this task has fallen to monetary policy. In September, after a prolonged series of rises that took the SELIC rate to 12.5% in July and although the rate of inflation was still at a peak, Brazil's central bank prioritized growth and started to lower the official interest rate without any warning. It lowered it again in October and the bulk of the evidence available suggests that it will cut the interest rate by another 50 basis points at the end of this month, leaving it at 11.0% till the end of the year. The capital requirements for consumer credit have also been relaxed and further stimuli of a similar nature have not been ruled out.
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The real has also joined in the fray. After a long period of appreciation, external uncertainty and increased risk aversion have weakened the currency to levels not seen since 2009. The expected monetary relaxation over the coming months should lead to even further depreciation in 2012, although the persistence of capital inflows and still favourable exchange periods will soften the blow.
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The real, on a clearly downward trend, has joined in the fray.
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In spite of the renewed countercyclical tone of economic policies, we do not expect any clear improvement in the rate of activity until mid-2012 (provided external conditions don't get much worse) and this improvement will probably be gradual. Moreover, the pace and intensity of stimuli will have to be carefully monitored while there is still pressure on prices. In this respect, the robustness of consumption and the inertia in wage formation (the main engine behind inflationary pressures) continue to cause doubts regarding the shift in monetary policy: inflation finally started to ease in October (to 6.97% and due particularly to favourable base effects) but refuses to move away from the level of 7% and is unlikely to return to the target range in 2011.
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With a view to 2013, and if the prognosis of a soft landing comes about, we do expect the progressive upswing in the global economy and the proximity of the World Cup to provide a new boost to growth in Brazil.
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