Interest Rate Hikes Not Reining In Brazil's Inflation

Brazilian inflation remains strong in spite of the extremely tight monetary policy with the basic interest rate (Selic) standing at 19.75%.

According to the latest estimates from the Brazilian Institue of Geography and Statistics, IBGE, the ample consumer price index or IPCA, during May accelerated to 0.83% from April's 0.74%. This last index was calculated between April 15 and May 14.

So far this year, IPCA has accumulated 3.38% and 8.19% in the last twelve months. Pharmaceutical prescriptions (4.16%), electricity (2.85%), public transport (2.11%) were the items which registered the highest increases, with food and beverage a more modest 0.64% and clothing 1.56%.

IBGE also reports that during April unemployment in Brazil remained unchanged at March's 10.8% following three months running of continuous increase. However compared to the same month in 2004, (13.1%), the index has dropped considerably.

In related news, Brazil also managed to float another US$ 500 million in sovereign bonds maturing in 2034. This follows a similar issue of US$ 500 million maturing in 2019 last May 10.

Brazil has plans to borrow US$ 6 billion  this year in international markets and so far has comfortably managed US$ 5 billion.

However the Organization for Cooperation and Economic Development cautions that the Brazilian economy will slow down in 2005 and 2006 because of the "restrictive" monetary policy.

Nevertheless OCED is confident that the Brazilian economy will expand 3.7% this year and 3.5% next year pushed by a strong domestic demand and low inflation.

Regarding the May 18 increase, (for the ninth consecutive month) of the basic interest rate to 19.75%, OCDE argues that this will help contain inflationary pressures related to the "high prices of crude and commodities as well as inflationary expectations".

OCDE points out that a more flexible monetary policy is possible if the Brazilian government keeps to the reform agenda.

Brazil expanded 5.2% in 2004 with an inflation of 7.6%, and a significant budget primary surplus enabled to lower the debt/GDP ratio to 52%.

This article appeared originally in Mercopress - www.mercopress.com.

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