Brasília, 7/1/2003 (Agência Brasil - ABr) - The Central Bank (BC) has reduced its estimate for this year's inflation from 10.8% to 10.2%.

The government's adjusted inflation target for this year remains 8.5%. According to BC director of Economic Policy, Ilan Goldfajn, that 8.5% target is very "ambitious." Goldfajn declared that the Central Bank always bases its projections on the future, not the past. That was a reference to what Goldfajn called "a very bad" first quarter.

Thus, because of that bad first quarter, in its latest Quarterly Inflation Report, the BC actually raised its estimate for the Broad Consumer Price Index (IPCA) for the 12-month period ending at the end of this year's second quarter, from 16.9% to 17.0%. That projection takes into consideration the reduction of the basic interest rate (Selic) from 26.5% to 26.0% annually by the Monetary Policy Committee (Copom) at it last meeting two weeks ago (the meeting ended on June 18), and an exchange rate at R$2.85. However, for the future, the report foresees two pronounced drops in the cumulative 12-month period IPCA: the first, between the third and fourth quarter, when cumulative inflation is projected to fall from 15.9% to 10.2%; and the second drop, between the fourth quarter of this year (2003) and the first quarter of next year (2004), when cumulative inflation is projected to fall from 10.2% to 5.9%.

Goldfajn says that the decision to raise telephone tariffs all at once (an increase that could be as much as 41.75%) will actually benefit long-term inflation (although there will be a spike in July). "The price increase was going to be spread out over the next six months or so, part of it now in 2003, another part in 2004." By concentrating the increase in July, the effect will be diluted over the next two years, reports the BC director.

Goldfajn, who is leaving the Central Bank, said he is in favor of the inflation target policy, pointing out that it helped Brazil get through the worse crisis ever in Argentina, its own energy crisis and the confidence crisis during last year's elections.

As for growth, lower domestic demand has forced the BC to reduce its GDP growth forecast from 2.2% for the year to between 1.5% and 1.8%. Goldfajn explains that, as the inflation report says, the reason for the reduction was a series of adverse factors during the first half of the year with the war in Iraq abroad, and the difficult domestic struggle to get inflation in line with government targets and projections. (AB)