MercoPress. South Atlantic News Agency

Orthodoxy and IMF win the day.

In spite of strong pressure and after two long days of deliberations, the Monetary Policy Committee of the Brazilian Central Bank, Copom, stood firm and kept the basic interest rate, Selic, unchanged at 26,5%.

Once again as in the previous two occasions, keeping inflation under control was the reasoning behind the move, but it also has President Luiz Inacio Lula da Silva administration divided in two clearly defined groups: orthodoxy and those who favor stimulating domestic demand and jobs.

Inflation is Brazil has been receding since the new government took office last January but still reached 6% in the first four months of 2003.

"There are signs that monetary policy is beginning to obtain results in fighting inflation", reads the official release, adding that Copom firmly believes that the consolidation in the receding of inflation depends on keeping this policy. Based on this, "Copom unanimously decided to maintain the Selic rate at 26,5%".

Actually markets had anticipated the decision since President Lula, Central Bank president Henirque Meirelles among others, plus a very timely visit of the very powerful IMF First Deputy Managing Director, Anne Krueger, had talked about the need to keep inflation under control.

However those who favored an easing of interest rates had in Brazilian vice president and textile tycoon José Alencar a strong voice who openly demanded a reduction arguing that the current situation only leads to a transfer of resources from productive Brazil to the financial sector. Mr. Alencar has the support of industry, retailing and a significant following among the Workers Party more traditional leadership.

"We are paying ten times the interest rate of competing countries, we can't be at the mercy of the people who have us in this strait jacket", emphasized Mr. Alencar addressing a meeting of city mayors in Minas Gerais.

President Lula said he was openly against high interest rates, "no one more than I, however we must follow the rules of the economy. The success of my government depends on a good performance of the Brazilian economy that will enable us to pick up again and grow vigorously".

Mr. Lula da Silva also sent a clear message to the administration: "no more government policy discussions in the newspapers, those who are entitled to talk about the economy are myself, vicepresident Alencar, Finance Minister Palloci and Central Bank president Meirelles".

Ms. Krueger who was in Brazil specially invited by Finance Minister Palloci, argued that it was essential to reduce the current GDP/debt ratio, which will then help reduce the Selic rate and retake growth.

Further on the IMF official praised Brazil for its macroeconomic stability and structural reforms saying that budget surpluses will help meet social targets, and considered undesirable any decision to limit short term capital into Brazil.

"Given the current financial needs of Brazil, a decision of this nature would be non efficient", said Ms. Krueger adding that as the situation improves, inflation keeps dropping and confidence stronger, investments in Brazil will become long term.

Primary activity polls indicate that the number of jobs in Brazilian industry dropped 0,5% from February to April and the income of industrial workers decreased 5,8% in the first quarter of the year. Industries particularly hard hit were, paper and printing with a 15,2% fall; machinery, communications and white line 13,3%; non-metal minerals 16,5%. Similarly sales cars in Rio do Janeiro during April fell 24,6%.

Brazil's inflation target for 2003 agreed with the IMF is 8,5%. In April 2002 the Selic or basic rate stood at 18,5%.-