Political Risk Latin America Blog @PolRiskLatam

Brazil economy: Inflation in the spotlight

Posted in News and Articles, Political Risk by politicalrisklatam on January 13, 2011

by The Economist Intelligence Unit, January 11th. 2010.

Brazil’s statistical agency (IBGE) has reported an inflation rate of 5.9% for full-year 2010, the highest in six years. This makes it more likely that the authorities will raise the benchmark interest rate this month, and places stronger pressure on the new government of President Dilma Rousseff to rein in public spending. However, policymakers are likely to struggle to balance the need to control inflation with exchange-rate and fiscal management, particularly given the new administration’s penchant to keep spending relatively high.

Food supply shortages, firm domestic demand growth and a rise in producer prices drove annual inflation to 5.9% (IPCA index) at year-end 2010, above the central bank’s central target of 4.5%. The 2010 rate compares with inflation of 4.3% in 2009, and was the steepest rate since the 7.6% posted in 2004.

Rising inflation has become the key policy issue in Brazil, alongside the strong currency, the Real. The central bank is expected to lift the Selic interest rate to around 11.25% at its next policy meeting on January 18th-19th, up from the current rate of 10.75%. This will be the first rate hike since last July.

However, in light of strong speculative capital inflows and the resulting currency appreciation (the Real strengthened 4.6% against the dollar in 2010, on top of appreciation of 34% in 2009), the authorities will want to avoid speeding up monetary tightening, which would only attract additional inflows. Indeed, members of the new administration have said they would like to see Brazil’s interest rates—the highest in the world—come down. To make this possible, they say they will focus more on fiscal adjustments to address demand and price pressures. (continue reading… )



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