MercoPress. South Atlantic News Agency

Brazilian bank warns about oil and inflation

If oil prices remain strong in world markets and inflation estimates for 2005 do not begin to fall, the Monetary Policy Committee of the Brazilian Central Bank will “adopt a more active monetary policy attitude”, that is the basic SELIC interest rate could further raise.

The warning was extracted from last week's Monetary Policy Committee discussion minutes when the basic rate remained unchanged at 16%, as has been since last April.

The minutes also indicate that in last month's meeting the Committee had already warned about the possibility of adopting a "more active attitude" regarding interest rates given the deterioration of inflation estimates.

Two main factors are influencing the risk of higher interest rates in Brazil according to the Committee: if the intense oil price escalation becomes even more persistent and this has secondary effects on the inflationary target commitment of the Central Bank.

Secondly, if oil price prospects continue the incipient deterioration of inflationary expectations for 2005 compared to where they stood some time ago.

"The situation is yet not consolidates in either exacerbation factor and therefore the Committee must remain alert to developments on both fronts", can be read in the minutes.

Brazilian government inflation estimates for this year and 2005 stand at 5,5% and 4,5%, but market analysts are skeptical those targets can be respected since the Brazilian domestic market seems to be recovering for the last three months.

Furthermore the strong industrial rebound has been reflected in unemployment numbers which keep dropping: in July they reached 11,2% of the active population, the lowest since last December when it stood at 10,9%.

The release from the Brazilian Statistics and Geography Institute which covers the country's six main metropolitan areas shows that unemployment has been falling for the last three months after having reached a record 13,1% last April. In July 2003 unemployment stood at 12,8%. In numbers this means that July 2003, 2,67 million Brazilians had no jobs compared to 2,4 million last July, that is a significant 10,1% difference. Compared to June 2004, then 2,5 million were unemployed, it means the number dropped by 103,000 in just one month.