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Brazil Industry Output Unexpectedly Shrank in September on Strong Currency

Brazil’s industrial output unexpectedly fell in September as the real strengthened close to a two-year high, reducing pressure on the central bank to raise interest rates next year.

Industrial production contracted 0.2 percent in September, the fifth monthly decline since April, the national statistics agency said today in Rio de Janeiro. Economists had expected output to expand 0.1 percent, according to the median forecast in a Bloomberg survey of 26 analysts. Output rose 6.3 percent from a year ago, the slowest annual pace this year and below analysts’ median forecast for a 7.1 percent increase.

The weakness in industry makes it less likely that policy maker will raise the benchmark rate next year, said Zeina Latif, a senior economist at RBS Securities Inc. in Sao Paulo. Output by Brazil’s industry is shrinking because of the strong currency and a slowdown in world trade growth, she said.

“This is good for the central bank,” Latif said in a telephone interview. “The assumption that currency appreciation is impacting industrial production has been confirmed.”

Brazilian manufacturers are being hurt by a rally in the nation’s currency, which touched a two-year high of 1.6530 per U.S. dollar on Oct. 13, even as credit growth and record low unemployment fuel domestic demand. The real’s 37 percent rally since the start of 2009 is the third best performance among major currencies tracked by Bloomberg, after the Australian dollar and South African rand.

The real strengthened 0.4 percent to 1.6834 per U.S. dollar at 8:33 a.m. New York time. In the overnight interest-rate futures market, the yield on the contract due in January 2012 rose two basis points, or 0.02 percentage point, to 11.35 percent.

Capital Goods

Capital goods production, a barometer of future investment, fell 2.6 percent from August, the statistics agency said. The only sectors that registered growth were production of consumer goods, which rose 0.9 percent, and semi and non-durable goods, which rose 1.3 percent.

Brazil’s manufacturers unexpectedly reduced the use of installed capacity to 81.9 percent in September, from a revised 82.2 percent in August, the National Industrial Confederation said in a report distributed today in Brasilia. The figures surprised all five economists surveyed by Bloomberg, whose median forecast was 82.4 percent.

Domestic Demand

The slowdown in production comes as domestic demand remains heated.

In August, retail sales expanded 2 percent from the previous month, their fastest growth since March. Unemployment fell to a record low 6.2 percent in September, as outstanding credit increased 19.7 percent from the same month a year ago to a record of 1.61 trillion reais ($950 billion).

Strong domestic demand and the need for companies to restock inventories could lead production to recover in the fourth quarter, said Jankiel Santos, chief economist at Banco Espirito Santo de Investimento in Sao Paulo.

“We have come to an end of this adjustment in inventory stocks in September,” Santos said in a telephone interview. “I doubt this downward trend will continue for the remainder of the year.”

Fed Decision

Still, the Federal Reserve’s decision yesterday to inject $600 billion into the U.S. economy through the purchase of debt will add pressure on Brazil’s currency, said Eduardo Galasini, head of proprietary trading at Banco Banif Primus in Sao Paulo.

“The Fed’s decision increases the global trend of continued dollar weakening,” Galasaini said in a telephone interview.

Brazil’s 12-month current account gap widened to a record high of $47.3 billion in September as domestic demand and the real’s rally boosted spending on imports.

The world’s eighth-largest economy will expand 7.3 percent this year, the fastest pace in more than two decades, according to a Sept. 30 central bank forecast.

Policy makers held the benchmark Selic rate at 10.75 percent last month, after raising borrowing costs 2 percentage points from a record low 8.75 percent earlier in the year

Analysts expect the central bank to raise the benchmark interest rate to 11.25 percent in April, and to 11.75 percent in June, according to the median forecast in an Oct. 29 central bank survey of about 100 economists.

Consumer inflation as measured by the IPCA-15 index accelerated to 5.03 percent in the year through mid-October. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

To contact the reporter on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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