In Brazil, for the fourth time in a row, institutions and analysts in the financial sector consulted by the Central Bank’s weekly survey, the Focus report, have reduced their forecasts for 2012 economic growth.
The latest Focus found that the market now sees GDP growth this year of 2.72%, compared to 2.99% in the prior weekly survey. On the other hand, market estimates of GDP growth in 2013 remain steady at 4.5%.
On Friday, June 1, the government statistical bureau (IBGE) reported that GDP growth in the first quarter of this year (January to March) was 0.2%, compared to the last quarter of 2011 (October to December). The IBGE reported that total economic activity in the first quarter was R$ 1,03 trillion.
Against this background, the Central Bank has been steadily reducing the country’s basic interest rate, the Selic. And, on May 30, the bank’s Monetary Policy Committee (Copom) announced it was lowering the Selic by 0.5 percentage points from 9.0% to a historic low of 8.5%.
The latest Focus survey found that the market expects the Selic to be at 8% at the end of this year. And the forecast is for Selic to be slightly above 9% at the end of 2013.
As for inflation (the government target is for it to be up 4.5%, plus or minus two percentage points), Focus found the market forecasting the Broad Consumer Price Index (IPCA) at 5.15% (down from 5.17% last week) for the year. The estimate for 2013 is 5.6%.
Interest Rate
The Copom’s decision to reduce the Selic, to 8.5% per year was unanimous. A note from Copom explained that the committee felt inflationary pressure was a “limited risk at this moment,” and that due to the “fragility of the global economy, pressure from abroad was deflationary.”
This was the seventh consecutive reduction of the Selic by Copom (meetings are held every six weeks) and met market expectations (as revealed in the Central Bank’s last weekly survey of financial institutions, the Focus report, released on May 28).
At 8.5% Brazil’s basic interest rate is at a record low. Historically, the lowest the Selic had ever been was 8.75% between July 2009 and April 2010. It then rose steadily, reaching 12.5% in July 2011.
Since then, over the last ten months, a long process of monetary policy loosening has taken place. And the majority of market analysts expect the Selic to continue its downward trend at the next Copom meeting scheduled for July 10 and 11.
Now the fact is that inflation in Brazil continues at a level above the government’s core target of 4.5% (with plus or minus 2 percentage points wiggle room). Even so, most analysts believe the Selic could go to 8% for a while and rise again in 2013 to as much as 9.5%.
This latest Copom meeting took place against a background of two big changes. First, under the provisions of a recently passed freedom of information law (Lei de Acesso à Informação), the votes by the members will be made public.
Second, under the provisions of a temporary presidential decree (“medida provisória – MP-567”) of May 4, there will be changes in passbook savings (“caderneta de poupança”) yields. That change will affect some 100 million Brazilians.
MP 567 establishes that when the country’s basic interest rate, the Selic, is 8.5% or less, the yield will be 70% of the Selic plus the so-called Referential Tax (Taxa Referencial – TR”) that the Central Bank calculates every day (in the past the yield was 100% of the Selic plus the TR).
In practical terms, the change means that with the Selic at 8.5%, under the old rules the annual yield would be 6.17% (the TR at the moment is 0.5% per month). But it will be 5.95% per year under the new MP 567.
IGP-M
The General Price Index – Market (Índice Geral de Preços – Mercado – IGP-M) rose 1.02% in May, compared to April. That is 0.17 percentage points more than it rose in April (0.85%), compared to March.
The IGP-M is a reference base for contract adjustments; most importantly, rent. Over the last twelve months the IGP-M has risen 4.26%. So far this year it is up 2.51%.
There was strong pressure on the IGP-M in the wholesale segment where the broad producer price index (Índice de Preços ao Produtor Amplo – IPA), which measures prices there, rose 1.17% in May, compared to April. In April, compared to March, it was up 0.97%.
There was also pressure in the construction segment (INCC) where labor costs rose 2.22% in May (after rising 1.08% in April).
The bright spot in this latest Getúlio Vargas Foundation (FGV) price survey was the Consumer Price Index (Índice de Preços ao Consumidor – IPC) that was down 0.49%, compared to April.
The producer (manufacturer) price index (“Índice de Preços ao Produtor – IPP”), which measures inflation at the factory door, before taxes and freight charges, rose 1.38% in April, compared to March. In March, it was up 1.04%, compared to February.
The increase of 1.38% this April was significantly higher than the increase in April 2011, when it rose 0.28%.
The numbers are from a regular monthly survey of 23 industrial segments by the government statistical bureau (“IBGE”).
The April survey found that in 21 out of the 23 segments surveyed there were price increases. The biggest increases were in food items (up 2.81%), other chemical products (up 2.78%) and refinery prices for petroleum and sugarcane-based products (up 1.37%).
The cumulative IPP increase for the year is now 1.55%. And the cumulative increase for the last 12 months is 2.47%
GDP growth during the first quarter of 2012 was 0.2%, compared to the last quarter of 2011.
According to the IBGE, compared to the first quarter of 2011, GDP growth in the first quarter of 2012 was up 0.8%. And during the last twelve-month period ending in March 2012, it has grown 1.9%.
