Related News:
Slowdown in Brazil Economy is Helping Fight Inflation, Central Bank Says
Brazil’s central bank said economic growth may have slowed to sustainable levels since the start of the year, helping to contain inflation risks.
A slowing Chinese economy and doubts about the strength of the U.S. recovery are helping to fight inflation that’s been above the government’s 4.5 percent target since January, the bank said today in the minutes of its July 20-21 meeting.
A drop in the inflation rate and evidence Latin America’s biggest economy is slowing prompted the central bank to reduce the pace of interest rate increases last week. Policy makers increased the Selic rate by 50 basis points to 10.75 percent, surprising 48 of 51 analysts surveyed by Bloomberg who expected at third straight 75 basis-point increase.
“The economy may have settled into a pace that is more in line with growth levels considered sustainable in the long term, as opposed to what was seen in the first quarter,” the bank said. “Available information confirms there was a worsening in the inflation dynamic at the start of 2010 but, on the other hand, a sharp improvement on the margin” since June.
The yield on the interest rate futures contract due in January, the most traded on Sao Paulo’s BM&F exchange, fell one basis point, or 0.01 percentage point, to 10.82 percent at 11:48 a.m. New York time. The real gained 0.2 percent to 1.7661 per U.S. dollar from 1.7690 yesterday.
Monetary Policy
Policy makers said there is consensus on the board about the need to adjust future monetary policy decisions to the inflationary outlook, which has improved since their June meeting.
“The minutes pave the way to an upcoming pause in the hiking cycle,” Marcelo Carvalho, head of the Latin American economic research at BNP Paribas in Sao Paulo, said in a phone interview.
Carvalho, who previously predicted that policy makers would raise rates by 50 basis points in September, now expects the Selic to remain unchanged at 10.75 percent.
Policy makers’ focus on China has risen as the world’s third-largest economy boosts imports from Brazil.
After surpassing the U.S. as Brazil’s largest export market in 2009, China bought 15 percent of the $89 billion exported by Latin America’s No. 1 economy in the first half of 2010.
China’s economic expansion eased to 10.3 percent in the second quarter from 11.9 percent in the preceding three months, the statistics bureau said July 15 as industrial output cooled more than forecast. China’s imports have surged, leading to its first monthly trade gap in six years in March, as rising domestic demand helps the global economy recover.
Resume Tightening
Traders are betting that policy makers will increase the overnight rate by 19 basis points in September, according to Bloomberg estimates based on interest-rate futures contract.
Given that the central bank raises rates by increments of 25 basis points, traders are split on whether the bank will pause or raise the Selic to 11 percent in their next meeting.
Consumer prices dropped in the month through mid-June for the first time in four years while retail sales and industrial production missed forecasts in May.
After the July 20-21 decision, Itau Unibanco Holding SA, Latin America’s biggest bank by market value, said the central bank is likely to keep the Selic unchanged for the remainder of the year. It will resume tightening in early 2011 as growth quickens later this year, Ilan Goldfajn, chief economist at the Sao Paulo-based bank, wrote in a July 21 e-mailed report.
Slower Growth
Economists forecast the Selic will jump to 11.75 by year- end, a central bank survey of 100 analysts published this week shows. The economy will expand this year by 7.2 percent, the fastest pace in more than two decades, the survey shows.
Brazil’s economic expansion will decelerate from its 9 percent pace in the first quarter after the government withdrew stimulus tax breaks and cut spending, and the central bank in April began to increase the benchmark rate from a record 8.75 percent low, Finance Minister Guido Mantega said in an interview last week.
Gross domestic product will grow 0.5 percent to 1 percent in the second quarter from the first three months of the year, Mantega said.
The central bank’s seasonally adjusted economic activity index fell in May for the first time since 2009 to 139.55 points from 139.55 points in April.
“The minutes gave a clear sign that either the tightening cycle is over or policy makers will raise rates by only a bit in September before pausing,” Roberto Padovani, chief economist at Banco WestLB do Brasil SA, said in a phone interview from Sao Paulo.
To be sure, unemployment fell in June to 7 percent, from 7.5 percent in May, the second-lowest rate on record. The creation of government-registered jobs in June hit the highest for the month since 2008, though the number was below analysts’ estimates.
The central bank’s inflation forecast for 2011 still remains above target should interest rates remain unchanged, according to the minutes.
To contact the reporters on this story: Andre Soliani Costa in Brasilia at asoliani@bloomberg.net; Iuri Dantas in Brasilia at idantas@bloomberg.net
Rate These Stories
Rate this Page