Rio, July 10, 2003 (Agência Brasil - ABr) - For economists in Rio de Janeiro, June's 0.15% deflation, in terms of the Broad Consumer Price Index (IPCA), the first deflation since November, 1998, represents another sign that the tendency for interest rates to fall will be sustained at the next meeting of the Central Bank's Monetary Policy Committee (Copom).
For the head of the Economic Advisory Office of the Rio de Janeiro Federation of Industries (Firjan), Luciana Marques de Sá, all the signs indicate that the austere monetary policy adopted by the government is producing the desired effects, including deceleration of inflation. She judged, however, that the Central Bank (BC) will be conservative.
"It really has to act cautiously in order not to miss the target" and over-stimulate the economy, she said. In this context, she estimated that a reduction of 1% per month in the prime rate (Selic) will make it possible to lower the annual rate to 20%, in December, in line with the forecast made yesterday in Brasília by the Minister of Finance, Antônio Palocci, during a meeting with leaders of parties that support the Administration.
A consensus exists with respect to lower interest rates, added the vice-president of the Economic Policy Council of the Rio de Janeiro Commercial Association, Alberto Furuguem, ex-director of the BC. In his assessment, all price indexes are demonstrating that inflation is under control, on both wholesale and retail levels, pointing to a new reduction in the prime interest rate.
Furuguem was even more optimistic. He ventured a guess that a 2% reduction would be totally feasible. If so, the prime rate would fall from 26% to 24% per year, still very high, when it is taken into account that the average annual inflation rate has been below 10% for the past 2-3 months. He affirmed that a 1.5-2.0% reduction would be well received and would serve to show that the government has inflation under control.
However, in the view of the economist, Adhemar Mineiro, of the Rio de Janeiro Inter-Union Department of Statistics and Socio-Economic Studies (DIEESE/RJ), deflation in the IPCA had already provided space for a reduction in interest rates. He explained that the higher inflation indexes were more the result of the rush towards the dollar, at the end of 2002, than any pressure from the demand side, which, was already depressed at that time.
The economist went on to say that interest rates could serve as an instrument to reduce inflation, if this had been caused by an increase in demand, which was not the case. He also pointed out that the major force behind price readjustments, such as those occurring now in energy and telecommunications rates, has a closer relation to the General Market Price Index (IGP-M), which suffers a greater influence from the fluctuation of the dollar, to which the IPCA is less bound.
Mineiro said that the Copom has room to lower the prime rate more than 1% at its next meeting, but he believes that the reduction will be slow. (DAS)
