Decline in Production and Lower Inflation in Brazil: A Reduction in the Target Rate (Selic)?

On a seasonally adjusted basis, industrial production in Brazil fell 5.2% in November from October, following a 2.8% decline in October from September. The November decline is one of the largest month to month declines on record. On a seasonally unadjusted basis, industrial production was 6.2% below November 2007, the largest year to year decline since December 2001. The year to year declines in production are shown in the first chart.

The Automobile, Office machinery and equipment and the Electrical material, devices and communication equipment industries were among the hardest hit, showing year to year declines of 31%, 30% and 21% respectively.

The sharp fall in industrial production has raised the possibility of a reduction in the target interest rate at the next meeting of the Monetary Policy Committee (COPOM) of the Central Bank of Brazil scheduled for January 20, 21, 2009. COPOM has been targeting inflation and raised the target rate, Selic, from 11.25% in March 2008 to 11.75% in April 2008 . Further increases took place in June, July and September, when the rate reached 13.75% where it has since remained. Inflation has now begun to lessen, if only slightly. The increase in the national consumer price index (INCP) was 7.20% in November, down from 7.56% in July. The rate of inflation and the target rate of interest are shown in the second chart.

There is a more general price index--the General Price Index (IGP M)--which is a weighted average of the CPI, WPI and the Cost Construction Indexes and measures the change in prices from the 21st of the previous month to the 20th of the current month. Since the year to year changes in the (IGP M) index are closely correlated with the those of the (INCP) as can be seen in the third chart, the trend in the (IGP M) changes is a good indicator of the trend in the national consumer price index. This Index is published about a week before the national consumer price index and suggests that inflation as measured by the CPI has continued to decline. in December.