Latin American economic analysis, week of July 4, 2005

Latin American economic analysis, week of July 4, 2005

News that Brazilian consumer prices fell in June may prompt the central bank to begin cutting interest rates as early as next month. According to the IPCA index issued by the Brazilian government, consumer prices fell 0.02 percent in June following a 0.49 percent rise in May. The decline is the first of its kind since June 2003 and was largely unexpected. The annual inflation rate also fell 0.78 percent to a seven-month low of 7.27 percent in June. That rate still remains well above the bank’s year-end target of 5.1 percent. Meanwhile, Brazil’s real has increased 23 percent since the first of nine central bank interest rate hikes in September. While that has driven down the price of imports, the real’s strength, which is the best of the 16 measured currencies, has eaten into exporters profit margins. Around the rest of the region, Chile’s peso weakened slightly against the dollar while Argentina’s peso gained and Colombia’s remained relatively unchanged. In Mexico, the peso was strong against the dollar this week adding about 0.3 percent to help bring its year-to-date progress to 3.7 percent. The central bank maintained interest rates after it was reported that consumer prices fell 0.10 percent in June after a 0.25 percent decline in May. The central bank has raised rates 12 times since February 2004 but recently stopped its policy of linking with the US Federal Reserve’s rate hikes. Instead, it has interpreted the declining consumer prices as the clearest sign yet that it is winning its war on inflation. Many believe that the central bank will now reverse direction and begin lowering rates in order to bring a much-needed boost to Mexico’s weakened economy. In stock market news, Mexican stocks had a fairly good showing this week as a strong US economy and high oil prices pushed its key index higher. In Brazil, stocks were lower on continued allegations of corruption in the government. In Argentina, new inflation worries countered a small early week rally and pushed stocks lower while in Chile, shares closed higher as demand for Chilean commodities pushed exports stocks upward.