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Enron Mail |
---------------------- Forwarded by Randall L Gay/HOU/ECT on 06/21/2000 01:15
PM --------------------------- Marcos_Cunha@WestLB.com.br on 06/21/2000 01:29:47 PM To: Marcos_Cunha@WestLB.com.br cc: Subject: Copom comment ---------------------- Forwarded by Marcos Cunha/SAO/WLB on 21/06/2000 15:01 --------------------------- Nicola Tingas 21/06/2000 12:21 To: Nicola Tingas/SAO/WLB cc: (bcc: Marcos Cunha/SAO/WLB) Subject: Copom comment Copom surprises with larger interest rates reduction Yesterday night the Brazilian Monetary Policy Committee (COPOM) made a larger than expected basic interest rates reduction. It came from 18.5% to 17.5% per year level, setting downward bias until next meeting on July 18-19. This will at least influence favorably the local markets, except foreign exchange in the short run, boosting the mood of the society which may follow business leaders who have already declared such one as a very positive move to the economic growth side. Assuming the move as first of others, despite not so large for the coming months, consumers expectations may boost promoting additional economic growth in the second semester. Argentina would eventually benefit in such scenario since it may export more to Brazil, helping its difficult situation by generation of additional reserves. At this moment, what local players are trying to do is to understand the rational of such move, which overcome the forecast of even the most optimistic of the analysts. The authority to justify the stronger move mentioned inflation forecasts declining. The last inflation targeting report of the Central Bank shows a forecast of 6.3% for the official index the IPCA in comparison with the inflation-target of 6% for 2000 year. In fact, the new forecast in the market is 5.5% for 2000, in the best view. Additionally, the last inflation targeting report shows a forecast of 3.3% against a target of 4% for 2001 year. However, market argues that this do not justifies the intensity of the decline, 100 basis points against markets maximum expectation of a 50 bp reduction. So, there must be other reasons to be understood. We can list some other positive reasons. Fiscal primary surplus performance is overcoming even the IMF goals. The cost of funding abroad is declining, as shown by yesterday?s successful sovereign placement of an EUR 750 millions Eurobond to yield 9.2%, comparably less than last September similar issue at 11.53%. We could include the better mood on the US economic growth adjustment; Argentina resistance to change the dollar pegged currency regime by new fiscal measures and some better mood in the world growth as potential factors affecting expectations. However, even all that does not justify the COPOM move for the majority of local market makers. They agree in the direction of the move, but not on the intensity and mainly not on the speed of the interest rates decline. We can list two other potential reasons for such move. One is related to a probable Standard & Poors upgrade on Brazil in the coming months, which may eventually be followed by Moody`s later. The second is a political influence to boost government?s popularity and I will risk saying even to make Finance Minister Pedro Malan?s candidacy to the Presidency in 2002 feasible. On that evaluation see the analisys of a political think tank based in Brasilia: ?That?s the most important political movement of the year. On political terms it became clear a favourable economic scenario, rebounding President Cardoso popularity and the chances of political victory increasing a lot, all that not ment<oning that the political noise in Brasilia will diminish". Nicola Tingas June 21, 2000.
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