---------------------- 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.