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Brazil’s Key Interest Rate Might Drop to 9.5% Much Sooner than Expected

Brazilian real Brazil Central Bank’s weekly survey of financial institutions and market analysts, known as the Focus report, found that estimates for the country’s benchmark interest rate, the Selic (now at 10.5% per year), were for the Monetary Policy Committee (Copom) to lower it to 9.5% by the end of this year.

However, the market sees it rising to 10.5% at the end of 2013.

It should be pointed out that Copom is meeting today and that expectations are definitely for a reduction  –  the question is how much. It is possible that the Selic will drop to 9.5% much sooner than expected.

With regard to inflation this year, as measured by the Broad Consumer Price Index (“IPCA”), the government’s official inflation yardstick, market estimates fell slightly from 5.29% to 5.24%. The official inflation target is 4.5%, plus or minus two percentage points.

However, the market raised its inflation projection for 2013 slightly from 5% to 5.02%.

Financial institutions and market analysts consulted by the Central Bank continue to forecast GDP growth for 2012 at 3.3%, as they have done for some weeks now.

At a recent press conference when he announced budget cuts totaling 55 billion reais (US$ 31 billion), minister of Finance, Guido Mantega, maintained his forecast of GDP growth at 4.5%.

The latest Focus report also found market forecasts for industrial growth this year had fallen slightly from 2.7% to 2.5%.

Although exports performed well in February, running a surplus of over US$ 1.7 billion for the first three weeks of the month, there was a foreign trade deficit in January, with the result that the cumulative surplus for the first two months of 2012 up to the third week of February, at US$ 429 million, is 78% less than the cumulative for the same period in 2011, when it was US$ 1.954 billion.

So far this year, exports are up 3%, compared to the same period in 2011, but the problem is that imports have risen 10% during the same period.

Thus, cumulative exports for 2012 (up to the third week of February) reached US$ 28.535 billion (compared to US$ 27.513 billion in 2011), while imports reached US$ 28.106 billion (compared to US$ 25.559 billion in 2011).

ABr

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