Brazil: Nobody Is Happy with the Prime

     Brazil: Nobody Is Happy with 
the Prime

    Even though it was
    expected by the majority of economists,
    Brazil’s productive sector didn’t like the Central Bank’s decision
    to maintain its high interest rate. The president of the National
    Industrial Confederation called the action "frustrating" and
    considered that the measure will affect investment decisions.
    by: Alana
    Gandra

    After meeting for nearly three hours, the Brazilian Central Bank’s Monetary
    Policy Committee (Copom) decided unanimously, and for the second straight
    time this year, to maintain the prime interest rate (Selic) at 16.5 percent
    per year, without bias. This means that the rate will remain unchanged for
    the next 30 days.

    This time the Copom chose
    just to announce the rate, without any additional observations on the reasons
    for the decision. The Bank’s justification will be spelled out in the Copom’s
    minutes, which should be released next Thursday (26).

    After analyzing the country’s
    macroeconomic indicators, especially the data on inflation, the president
    of the Bank, Henrique Meirelles, and the other eight Bank directors who form
    the committee decided not to tamper with the Selic (Sistema Especial de Liquidação
    e Custódia), Brazil’s basic interest rate.

    The decision did not surprise
    the financial market. Most analysts already expected the Selic to be maintained,
    after the Copom decided last month to interrupt the succession of interest
    rate cuts. Between May and December, 2003, the Selic was reduced from an annual
    rate of 26.5 percent to 16.5 percent, a cumulative decline of 10 percent last
    year alone.

    Even though it was expected
    by the majority of economists, the result did not please the productive sector.
    The National Industrial Confederation (CNI), for example, regarded the maintenance
    of the Selic at 16.5 percent as "frustrating." According to CNI
    president Armando Monteiro Neto, the decision "acts in a negative way
    on the expectations of economic actors, and this will affect investment decisions."

    For Monteiro Neto, the
    Central Bank overestimated the seasonal and temporary inflationary pressures
    that occurred at the beginning of the year. According to the CNI, the Brazilian
    economy has been presenting a picture of improvement—a fall in the Brazil
    risk premium, an exchange rate with the dollar under R$ 3.00, and expectations
    that inflation will be under control for the next 12 months. Moreover, the
    international scenario is "very positive" at the moment, which would
    justify an interest rate reduction.

    Workers Criticize

    The Workers’ Central Union
    (CUT) also criticized the Central Bank’s decision to hold the prime interest
    rate at 16.5 percent per year. "Maintaining the same interest rate level
    as in January means jeopardizing all the growth targets and continuing to
    sacrifice workers and reward only those who have been getting rich off high
    interest rates," the note affirms.

    The message was directed
    at the financial system, which, according to the CUT, obtained "astronomical"
    profits in 2003. In the note the CUT recalls the promise made by President
    Luiz Inácio Lula da Silva, who referred to the "growth spectacle,"
    growth that is imperiled if the Copom continues to bet conservatively and
    believe that "the economic indicators show positive results by inertia."

    The CUT note begins by
    labeling the Central Bank’s decision as "unbelievable" and concludes
    by affirming that "it is difficult to believe that the broad public,
    that is, Brazilian society, will want to continue watching reruns, because
    it knows that the end isn’t a happy one for anybody."

    The Union Force, another
    labor union, issued a note in which it expressed its perplexity over the "Copom’s
    lack of sensitivity when it decided to maintain the prime rate at 16.5 percent."

    The labor group criticized
    the monetary policy that has been "awarding the banking sector with record
    profits, to the detriment of production and employment."

    The decision, according
    to the Force, does not contribute to the resumption of economic growth. "We
    deeply regret this tragic decision, which already jeopardizes the first half
    of 2004 and frustrates popular aspirations for more jobs."

    Industry
    Not Happy

    The president of the Paraná
    Industrial Federation (Fiep), Rocha Loures, called the decision by the Monetary
    Policy Committee to keep the country’s basic interest rate (Selic) unchanged
    at 16.5 percent annually, "a cold water bath for the economy." Loures
    added that the government was making it difficult for the economy to reach
    its own level of activity. "The high interest rate policy represses development,"
    he declared.

    Spokesmen for the Rio
    de Janeiro industrial federation (Firjan) declared that there was room for
    further reductions in the rate and they were disappointed. A note said there
    was no danger of a generalized increase in prices and that a window of opportunity
    had been closed, a window leading to the possibility of renewed growth.

    The Rio commercial federation
    (Fecomercio/RJ) was harsher in its criticism of the Copom decision. "This
    is not welcome news for an economic segment where sales were down 3.6 percent
    in 2003. We represent 318,000 firms that employ 1.8 million people. And we
    can tell you that there is no inflationary pressure due to demand," declared
    Orlando Diniz, president of the Fecomercio/RJ.

    On the other hand, according
    to the director of variable income at the Banco Santos, Eduardo Fornazier,
    the Copom decision was expected. But he pointed out that the decision was
    based on projected rises in the Broad Consumer Price Index (IPCA), which should
    not be the case in March making it possible to reduce the Selic by 0.25 percentage
    points at that time (that is, at the next Copom meeting which begins on March
    16).

    Finally, economist Alberto
    Furuguem, of the Economic Policy Council at Fecomercio/RJ (Conselho de Política
    Econômica da Associação Comercial do Rio de Janeiro),
    said the Copom decision to keep the Selic at 16.5 percent without any further
    indication of whether it will rise or fall at the next meeting was not a surprise.

    Furuguem said the decision
    was in keeping with average market expectations. "It just shows a conservative
    positioning of the Central Bank, but it does not rule out further reductions
    in the future," he declared.

    Furuguem pointed out there
    were no threats of inflation in March or April, with the recent price spike
    at an end. Therefore, he said, he believed that the Selic should continue
    to drop in the next few months.

    The Fecomercio/RJ economist
    concluded by saying that in his opinion the great anti-inflationary anchor
    this year is going to be the exchange rate. He pointed out that the dollar
    closed out 2003 at less than R$3.00, compared to market estimates of up to
    R$3.20. He added that the trade surplus had helped keep the dollar down and
    without pressure from prices there was no reason not to expect further reductions
    in the interest rate.


    Alana Gandra works for Agência Brasil (AB), the official press agency
    of the Brazilian government. Comments are welcome at lia@radiobras.gov.br

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