MercoPress. South Atlantic News Agency

Brazil admits higher inflation

The Brazilian government admitted this week that inflation in 2004 will be above the 2004 target of 5,5% According to the latest estimates from the Finance Ministry, the Consumer Price Index will reach 6,37% this year.

Last March when the review of the federal budget targets, the government insisted in an attainable 5,5%, but given the 2,23% recorded in the first four months it admitted the new index more in line with private market expectations, that is above 6% with a 2 points plus/minus margin.

More inflation has forced the Finance Ministry to down grade its GDP estimate in the Brazilian currency Real, meaning that the primary surplus of the federal government will stabilize in 2,45% of GDP.

The negative sliding of this year's targets plus the 0,8% contraction of the Brazilian economy in 2003 has opened a debate in President Luiz Inacio Lula da Silva's administration about the need to, besides fighting inflation, establishing a growth target.

Last week President Lula da Silva currently in China admitted the possibility of a simultaneous growth target together with keeping inflation down.

"President Lula is absolutely right. Besides the inflation target which is responsibility of the Central Bank we need the country to have a growth objective", said Central Bank president Henrique Meirelles.

However there are differing opinions in the Brazilian Central Bank Monetary Policy Committee that every month establishes the Brazilian Federal Bonds rate, Selic, which now stands at 16%.

Of its nine members in the last meeting, six voted to keep the rate unchanged, as happened, and three favoured a 0,25% reduction.

Inflation expectations are closely linked to interest rates and the new 2004 target (6.37%) which also forced to raise the 2005 inflation estimate from 5,10% to 5,15%, has a direct impact in the Selic rate.

Private analysts now believe the Selic rate in 2004 will end at 14,5% instead of 14% and remain in 13% during 2005.

Economists polled by the Brazilian Central Bank estimate that the Real/US dollar exchange rate for December 2004 will stand at 3,08 instead of 3,05, even when now because of the oil crisis it has temporarily shot to 3,16.

Central Bank and private sector coincide that the exchange rate in 2005 will be in the range of 3,21 Reales to the US dollar. This means that the country's debt/GDP ratio for Brazil this year will stand at 57% and in December 2005, 55,4%.

The only sector that keeps generating encouraging numbers is Brazil's foreign trade with an accumulated surplus of 9,9 billion US dollars in the first four months of 2004. This means Brazil could end 2004 with a 26 billion US dollars surplus instead of the previously estimated 25,3 billion.