Brazil 2005 inflation forecasts rise, growth cut
Brazil's financial markets have raised their forecasts for 2005 inflation and cut those for growth, according to a survey released on Monday, surprising investors after the Central Bank raised interest rates aggressively last week to improve prospects.
The deterioration in next year's expectations, which had remained stable since the bank began raising rates last month, was triggered by fears that the price of Brazilian fuel has still to rise in line with international oil prices, economists said."This will be done in 2005," said a research note from Brazilian bank Bradesco.
Economists based at 100 financial institutions and polled by the central bank last week on average raised their forecast on 2005 inflation measured by the benchmark IPCA index to 5.89 percent from 5.81 percent. They increased their 2004 inflation forecast to 7.18 percent from 7.16 percent.
The economists also cut their 2005 economic growth forecast to 3.5 percent from 3.6 percent but raised their 2004 projection to 4.56 percent from 4.53 percent.
Investors had expected 2005 forecasts to remain stable, or even improve, after the Central Bank increased its Selic benchmark lending rate a higher-than-expected half percentage point on Oct. 20 to a 10-month high of 16.75 percent.
Sao Paulo's benchmark Bovespa stockmarket index was down 1.07 percent by early afternoon.Some economists said inflation expectations should stabilize again in coming weeks as the 50 basis point cut filters into forecasts.
"I expect us to see some kind of stabilization in forecasts next week; obviously (this week's survey) is a surprise," said economist Jankiel Santos of ABN Amro in Sao Paulo.
State oil company Petrobras made only a modest increase in fuel prices this month. But with international oil prices setting new highs above $55 a barrel, Finance Minister Antonio Palocci also hinted more increases were on the way.
The government's fixed rates for fuel, energy and utilities can lead to a vicious circle of rising inflation and prices.So-called "administered" prices make up about 30 percent of the weight of the IPCA index. Brazilian inflation indices, like the IPCA, are in turn used to set about a third of all prices in the economy.
Central Bank rate hikes to break cycles of rising prices and inflation led to "stop-and-go" growth throughout the 1990s. Brazil needs sustained, 5 percent-plus economic growth to create jobs and shrink wealth inequalities, economists say.
(From Reuters, October 25, 2004)
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