President Lula is expected to win
re-election later this month. Even if he
does not, there is a low risk that either the economic policy
orientation or the political climate will change sharply. Policy
will continue to be guided by a medium-term framework encompassing
fiscal discipline, a floating exchange rate, and
inflation-targeting. Fiscal policy is tailored to stabilise the
public debt, rather than to manage demand, and although the easing
begun by the Banco Central do Brasil (the Central Bank) in
September 2005 will entail additional cuts, real interest rates
will remain relatively high. Growth in 2004-05 was driven
predominantly by external demand, whereas domestic private-sector
demand will play a larger part in 2006-07. If world GDP and trade
continue to expand, Brazil's current
account will stay in surplus, although the surplus
is likely to narrow, as imports
strengthen in the outlook period.
Political outlook
No substantive change. The latest polls of voting intentions
suggest that Mr da Silva is on track to win outright in the first
round of the election on October 1st.
Economic policy outlook
Following the release of weak second-quarter GDP data, the
monetary authority eased more than expected at its August 30th
meeting, cutting its benchmark Selic rate by 50 basis points. On
the assumption that inflation is contained and the exchange rate
remains stable, we now expect a further easing by 75 basis points
in 2006, and a year-end rate close to 12% in 2007. However, if
inflation remains contained, rates could fall further.
Economic forecast
In light of a weaker than expected second quarter, we now expect
full-year growth of 3.1% this year (previously 3.4%). The moderate
forecast strengthening in 2007 is premised on the assumption of a
gradual acceleration in investment. We have revised down our
year-end inflation forecast for 2006 to 3.5%. |
