Brazil's central bank predicts 2003 inflation of 8.5 percent

www.sfgate.com Tuesday, January 21, 2003

(01-21) 12:22 PST BRASILIA, Brazil (AP) --

Inflation in Brazil for 2003 should drop to 8.5 percent from 12.5 percent in 2002, the country's central bank president said Tuesday.

The 2003 inflation target unveiled by Henrique Meirelles was within analysts' expectations, but is more than double the previous government estimate of 4 percent.

The target for 2004 inflation is 5.5 percent, up from the previous 3.8 percent government estimate, Meirelles said.

Consumer prices soared more than expected last year in large part because of a 35 percent drop in the value of the Brazilian currency, the real.

Investors sent the real plunging and cut off credit lines to Brazilian companies over concerns that Brazil's new leftist president would put in place policies that could lead to a default on the country's massive foreign debt. Brazil was also hit hard by rising oil prices.

Meirelles blamed last year's inflationary pressures on "a crisis of confidence in the Brazilian economy."

The real strengthened somewhat after President Luiz Inacio Lula da Silva appointed Meirelles and other fiscal moderates to key economic posts, and pledged to honor Brazil's obligations.

Meirelles said that Brazil's 2003 yearly inflation rate would remain high through the fall, but should drop rapidly in the fourth quarter and meet the year-end target.

But he warned that the inflation targets for 2003 and 2004 could change if outside factors affect Brazilian consumer prices. One possibility cited by analysts is a U.S.-led war with Iraq.

An inflation target of 8.5 percent is compatible with 2003 economic growth in Brazil of 2.5 percent, Meirelles said.

Brazil's economy could contract 7.3 percent if the monetary authority tried to bring inflation down to 4 percent by the end of the year, the central bank said.