MercoPress. South Atlantic News Agency

Crucial week for Brazilian markets

Brazilian market analysts believe the country controversially high interest rates could have reached a peak and will begin dropping following this week's meeting of the Central Bank's Monetary Policy Committee, Copom.

Orthodox Finance Minister Antonio Palocci who at all moments has stated that until inflation is securely under control, no interest rate reduction is possible, this Monday on inaugurating a foreign trade conference of the Brazilian Banks Federation hinted to a possible easing of the basic Selic rate that now stands at 26,5%, with an estimated annual inflation in the range of 10%.

"The fact that all inflation indexes are converging to the established target, (and agreed with the IMF 8,5%), is excellent news. That is we can plan growth with inflation tightly under control", said Mr. Palocci.

The tough high interest rate policy since the Luiz Inacio Lula da Silva administration took office last January has come under growing criticism even from the president's party and vice president Mr. Jose Alencar who in a public address called the Brazilian Central Bank authorities "ignorant of reality" becoming the natural leader of the pragmatic wing of the government as opposed to the "doctrinaires".

Industrial unemployment figures from Sao Paulo, --the country's locomotive— are over 20%; the steepest drop in industrial production since 1994; a flat domestic market; rocketing numbers of returned checks and the plunging of demand for durable goods support pragmatics critics of the current policy.

"Copom is responsible for establishing monetary policies that ensure the retreat of inflation. And as we had a moment when rates went up, and the fight against inflation is proving successful, there will come a moment when interest rates drop", anticipated Mr. Palocci.

Gabriel Jorge Ferreira president of the Brazilian Banks Federation said he expected the Copom decision to be strictly technical, "an autonomous decision in spite all the pressure".

However Mr. Palocci admitted an asymmetrical functioning of the Brazilian economy with some areas rapidly growing, such as agro business and exports, and others geared exclusively for the domestic market lagging. Mr. Palocci highlighted that Copom takes into account both the need to defeat inflation and defend the country's economy.

Mr. Palocci's statements follow other recent Central Bank officials' remarks describing the results of combating inflation as "consistent", and consider the time for a "gradual change in monetary policy" has arrived.

Sao Paulo analysts believe the Copom will recommend half a point drop in the Selic rate, from 26,5 to 26%, and a further 1,5 drop can be expected in July, with the basic rate standing at 21% or below by the end of 2003.

Brazilian annualized inflation has been gradually dropping and now is below 12%, and June's forecast is that the tendency will remain strong.