Brazil Explains High Interest Rates: Christmas and Oil

The growing disparity between wholesale and retail industrial prices – which constitutes a source of inflationary pressure, especially with the upswing in year-end demand -, together with the jump in oil prices, heightened the risks for domestic price trends.

This explanation appears in the minutes of last week’s meeting of the Monetary Policy Committee (Copom), which raised the government’s annualized benchmark interest rate (Selic) from 16.25% to 16.75%, despite the favorable recent inflation performance.


It should be recalled that the Broad Consumer Price Index (IPCA) registered an inflation of only 0.33% in September, a significant drop in relation to the 0.69% registered in August.


The document, released today by the Central Bank, states that, despite the recent deceleration in wholesale industrial prices, the cumulative increase in the July-September quarter amounted to 4.8%, while retail prices, as measured by the IPCA, rose only 1.3%.


For this reason, the minutes emphasize the “transitory nature of a large part of the positive influences observed during the period” and note that inflation forecasts are running higher than the mid-range target of 5.5% for this year and next year’s objective of 5.1%.


According to the Copom minutes, the scenario considered in simulations of the future retains the projection that gasoline prices will suffer an overall readjustment of 9.5% this year, despite doubts regarding the world oil market.


Bottled cooking gas, in turn, is expected to be readjusted 4.9%, a smaller overall increase than last month’s estimate of 6.2%.


The Copom maintained its projection from last month that the basket of prices regulated by contract and monitored by the government will rise 8.5% this year and 6.9% in 2005.


Residential electric bills will end the year costing 11.5% more (the same percentage as in the previous estimate).


The only change, in an upward direction, was in the area of fixed telephone service, for which the increase is now expected to total 14% (instead of 13.9%).


According to the Copom minutes, the cooling-off of inflation in free market prices, especially for unprocessed food items, was insufficient to halt the deterioration of expectations regarding inflation in 2005,” despite the appreciation of the exchange rate, the favorable performance of current inflation, the recent drop in international prices of important commodities, and the signs of a tightening in monetary policy in recent months.”


Agência Brasil
Translator: David Silberstein

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