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Brazil
In Brazil, the surprise came once again from monetary policy. After four consecutive cuts of 50 bp, the central bank (BCB)
decided to ease monetary conditions more rapidly, cutting its key policy rate (Selic) by 75 bp on 7 March. Neither the press
release nor the minutes provided much explanation for this decision, leaving the door open to several assumptions. The
only elements of certainty are the future path of the Selic (expected to be cut to as low as 9%) and the government’s
determination to bolster the industrial sector and combat the appreciation of the exchange rate.
The BCB in the spotlight once again
Selic rate: faster towards the same destination
The surprise came once again from monetary policy. After four consecutive
cuts of 50bp, the central bank (BCB) decided to ease monetary conditions more
rapidly, cutting the Selic rate by 75 bp on 7 March. Neither the press release
nor the minutes provided much insight into the rationale behind this decision.
The former stated simply that this was “giving continuity to the adjustment
process of monetary conditions”. The latter contained no new information that
could have justified an acceleration in the easing pace. The monetary policy
committee (Copom) even noted that the latest inflation figures were in line with
what was expected in January, and therefore indicated that it was only
“redistributing along time” the adjustment of monetary policy conditions. To be
clear, sole the pace of easing has changed “at this time”, while the overall size
of the monetary adjustment contemplated remained unaltered. Plainly
speaking, the final destination remains the same, but the road there will be
faster. Lastly, the monetary authorities provided additional indications about the
future path of the Selic: not only below 10%, but also “slightly above the historic
lows levels”. As the Selic’s all-time low is 8.75% (in July 2009), the target
seems to be 9%. This could be reached at the next meeting in April.
Inflation: questions over the target
The latest developments on the inflation front are yet far from being as
favourable as they may appear at first glance. While the year-on-year change in
the consumer price index (IPCA) has subsided markedly from the 7.3% peak of
September 2011, this decline largely reflects favourable base effects and the
positive impact of the changes in methodology introduced at the start of the
year1. Most of all, at 5.2%, it is still well above the BCB’s supposed target of
4.5%, reflecting in particular an inflation rate still close to 7.5% YoY in the
services.
Fewer and fewer are expecting inflation to decline to the target rate in the near
future and they may end up in the right. Indeed, the economic literature
suggests that credibility is a key factor in the success of inflation targeting
policies: to be short, when economic agents do not believe the target will be
met, this target ends up being missed. At present, private sector analysts
surveyed by the BCB believe inflation will end up at about 5% - 5.5% and not
4.5%. Even out to 2016, inflation expectations have diverged from the centre
point of the target range following the latest monetary policy decision.
The forecasting models used by the BCB hardly point to a much more
favourable outlook, at least not beyond the very short term. While they indicate
that inflation should fall back into line with the 4.5% target by the end of 2012,
they suggest that it will remain above 5% at the end of 2013, even if the
monetary authorities raise the Selic back to 10% (“market scenario”, in which
exchange rate and interest rate assumptions are aligned with private sector
expectations). As inflation targeting policies are supposed to anticipate inflation
trends beyond the very short term, only three hypotheses are able to explain
the recent acceleration in the easing pace (and potentially justify its
continuation).
The first is that, due to still high uncertainties at the global level, the Copom is
giving less importance than usual to the models’ results. The monetary
authorities did clearly emphasise the downside risks inherent in the inflation
forecasts in the recent inflation report. The second assumption is that the
monetary authorities are planning to turn to other instruments (so-called macroprudential
instruments with a view to curbing credit growth) than the key policy
rate to bring inflation back to the target level. This option has been clearly
mentioned by the BCB’s representatives over the course of the last few months.
Lastly, it is possible that the BCB is inclined to tolerate a slightly higher inflation
rate because it attaches more importance to other objectives than in the past.
Growth: industry at the heart of concerns?
Developments on the growth front, however, do not provide any obvious
justification for cutting faster the Selic. Admittedly, Q4 growth figures (+0.3%
QoQ) and the slight contraction in the IBC-Br (monthly GDP proxy) in January (-
0.1% MoM, resulting in a +0.6% QoQ statistical carry-over for Q1) suggest that
the recovery still lacks vigour. But the worse is clearly behind and the trends in
domestic demand suggest that the economy is likely to return to above potential
growth rates in Q2. Retail sales actually surprised on the upside in January,
posting growth of 2.6% MoM (+1.4% MoM for the broad measure, which
includes cars and construction materials). These figures should obviously be
interpreted with caution, given the methodological changes 2 introduced in
January, but the vigour of domestic demand is undisputable. Moreover, labour
market trends remain very supportive for household consumption. The
unemployment rate is at a record low of 5.5% (seasonally adjusted) and the
trend in nominal wages (+10.5% YoY in February) continues to reflect the sharp
increase in the minimum wage at the start of the year and the labour market
tightness. Only trends in industry remain somewhat discouraging. Value added
in the sector actually continued to contract in Q4 and production fell back a
further 0.5% over the two months of January-February compared with the
previous quarter’s average.
Exchange rate: leaning against the wind
The government announced new measures (tax relief, loans at subsidised
interest rates by the BNDES) to protect the industrial sector from the
“predatory" practices of the wealthiest nations. It also reiterated its commitment
to combat the appreciation of the real, from which industry is the first sector to
suffer. Measures to restrict capital inflows have been tightened (taxation on all
issues of external debt with a maturity of less than 6 years, stricter framework
for export financing) and the finance minister explicitly stated that other
measures were in the pipeline.
The BCB has played its part by continuing to intervene in the spot and
derivatives markets. Exchange rate appreciation has not been mentioned as a
justification for cutting faster, but might have had some relevance in the final
decision. Moreover, on several occasions in recent months, the government
has conveyed the decline in interest rates as a crucial piece of its strategy to
combat the appreciation of the exchange rate.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Brazil
In Brazil, the surprise came once again from monetary policy. After four consecutive cuts of 50 bp, the central bank (BCB)
decided to ease monetary conditions more rapidly, cutting its key policy rate (Selic) by 75 bp on 7 March. Neither the press
release nor the minutes provided much explanation for this decision, leaving the door open to several assumptions. The
only elements of certainty are the future path of the Selic (expected to be cut to as low as 9%) and the government’s
determination to bolster the industrial sector and combat the appreciation of the exchange rate.
The BCB in the spotlight once again
Selic rate: faster towards the same destination
The surprise came once again from monetary policy. After four consecutive
cuts of 50bp, the central bank (BCB) decided to ease monetary conditions more
rapidly, cutting the Selic rate by 75 bp on 7 March. Neither the press release
nor the minutes provided much insight into the rationale behind this decision.
The former stated simply that this was “giving continuity to the adjustment
process of monetary conditions”. The latter contained no new information that
could have justified an acceleration in the easing pace. The monetary policy
committee (Copom) even noted that the latest inflation figures were in line with
what was expected in January, and therefore indicated that it was only
“redistributing along time” the adjustment of monetary policy conditions. To be
clear, sole the pace of easing has changed “at this time”, while the overall size
of the monetary adjustment contemplated remained unaltered. Plainly
speaking, the final destination remains the same, but the road there will be
faster. Lastly, the monetary authorities provided additional indications about the
future path of the Selic: not only below 10%, but also “slightly above the historic
lows levels”. As the Selic’s all-time low is 8.75% (in July 2009), the target
seems to be 9%. This could be reached at the next meeting in April.
Inflation: questions over the target
The latest developments on the inflation front are yet far from being as
favourable as they may appear at first glance. While the year-on-year change in
the consumer price index (IPCA) has subsided markedly from the 7.3% peak of
September 2011, this decline largely reflects favourable base effects and the
positive impact of the changes in methodology introduced at the start of the
year1. Most of all, at 5.2%, it is still well above the BCB’s supposed target of
4.5%, reflecting in particular an inflation rate still close to 7.5% YoY in the
services.
Fewer and fewer are expecting inflation to decline to the target rate in the near
future and they may end up in the right. Indeed, the economic literature
suggests that credibility is a key factor in the success of inflation targeting
policies: to be short, when economic agents do not believe the target will be
met, this target ends up being missed. At present, private sector analysts
surveyed by the BCB believe inflation will end up at about 5% - 5.5% and not
4.5%. Even out to 2016, inflation expectations have diverged from the centre
point of the target range following the latest monetary policy decision.
The forecasting models used by the BCB hardly point to a much more
favourable outlook, at least not beyond the very short term. While they indicate
that inflation should fall back into line with the 4.5% target by the end of 2012,
they suggest that it will remain above 5% at the end of 2013, even if the
monetary authorities raise the Selic back to 10% (“market scenario”, in which
exchange rate and interest rate assumptions are aligned with private sector
expectations). As inflation targeting policies are supposed to anticipate inflation
trends beyond the very short term, only three hypotheses are able to explain
the recent acceleration in the easing pace (and potentially justify its
continuation).
The first is that, due to still high uncertainties at the global level, the Copom is
giving less importance than usual to the models’ results. The monetary
authorities did clearly emphasise the downside risks inherent in the inflation
forecasts in the recent inflation report. The second assumption is that the
monetary authorities are planning to turn to other instruments (so-called macroprudential
instruments with a view to curbing credit growth) than the key policy
rate to bring inflation back to the target level. This option has been clearly
mentioned by the BCB’s representatives over the course of the last few months.
Lastly, it is possible that the BCB is inclined to tolerate a slightly higher inflation
rate because it attaches more importance to other objectives than in the past.
Growth: industry at the heart of concerns?
Developments on the growth front, however, do not provide any obvious
justification for cutting faster the Selic. Admittedly, Q4 growth figures (+0.3%
QoQ) and the slight contraction in the IBC-Br (monthly GDP proxy) in January (-
0.1% MoM, resulting in a +0.6% QoQ statistical carry-over for Q1) suggest that
the recovery still lacks vigour. But the worse is clearly behind and the trends in
domestic demand suggest that the economy is likely to return to above potential
growth rates in Q2. Retail sales actually surprised on the upside in January,
posting growth of 2.6% MoM (+1.4% MoM for the broad measure, which
includes cars and construction materials). These figures should obviously be
interpreted with caution, given the methodological changes 2 introduced in
January, but the vigour of domestic demand is undisputable. Moreover, labour
market trends remain very supportive for household consumption. The
unemployment rate is at a record low of 5.5% (seasonally adjusted) and the
trend in nominal wages (+10.5% YoY in February) continues to reflect the sharp
increase in the minimum wage at the start of the year and the labour market
tightness. Only trends in industry remain somewhat discouraging. Value added
in the sector actually continued to contract in Q4 and production fell back a
further 0.5% over the two months of January-February compared with the
previous quarter’s average.
Exchange rate: leaning against the wind
The government announced new measures (tax relief, loans at subsidised
interest rates by the BNDES) to protect the industrial sector from the
“predatory" practices of the wealthiest nations. It also reiterated its commitment
to combat the appreciation of the real, from which industry is the first sector to
suffer. Measures to restrict capital inflows have been tightened (taxation on all
issues of external debt with a maturity of less than 6 years, stricter framework
for export financing) and the finance minister explicitly stated that other
measures were in the pipeline.
The BCB has played its part by continuing to intervene in the spot and
derivatives markets. Exchange rate appreciation has not been mentioned as a
justification for cutting faster, but might have had some relevance in the final
decision. Moreover, on several occasions in recent months, the government
has conveyed the decline in interest rates as a crucial piece of its strategy to
combat the appreciation of the exchange rate.
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