Brazil Output Falls by Most Since April as GDP Weakens

(Corrects headline to show decline was most since April.)

Brazil’s industrial production fell more than economists expected in September, posting its steepest decline in five months and bolstering the central bank’s argument for more interest-rate cuts in Latin America’s largest economy.

Output fell 2 percent in September, more than all 38 estimates in a Bloomberg survey of economists whose median estimate was for a 1.2 percent decline. It was the biggest decline since a 2.3 percent contraction in April. Production shrank 1.6 percent from a year ago, the national statistics agency said in Rio de Janeiro.

Brazil’s industrial sector has been the hardest hit by Europe’s debt crisis and slowing growth in the U.S. The economic activity index, a proxy for gross domestic product, contracted 0.53 percent in August, its biggest monthly drop since the global financial crisis of 2008.

In an attempt to protect Brazil from the worst of the crisis, the central bank last month cut interest rates by half a percentage point for a second time, lowering the benchmark Selic rate to 11.5 percent. Economists expect policy makers to lower borrowing costs a further half-point this month, and to 10.50 percent by the end of 2012, according to a central bank survey of about 100 economists published yesterday.

The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, fell seven basis points to 10.22 percent at 7:18 a.m. New York time. The real weakened for a second straight day, falling 1.5 percent to 1.7418 per U.S. dollar.

Capital Goods Decline

Production of capital goods, a barometer of investment, fell 5.5 percent in September, the statistics agency said today. Manufacturing of durable goods led all other categories, declining by 9 percent, shrinking at more than twice the 4.2 percent negative pace registered in August.

A slowdown in Brazilian factories has helped control inflation expectations. Economists cut their forecast for 2012 consumer prices increases for the second straight week in the central bank survey, to 5.59 percent from 5.60 percent.

In the first half of the year, President Dilma Rousseff gave tax breaks to manufacturers and raised levies on imports from China after a surge in the real made Brazilian goods less competitive. The European debt crisis prompted investors to sell emerging market assets, pushing Brazil’s real down as much as 18 percent against the dollar between August and October. Over the past month the real pared its losses, gaining 8 percent.

Braskem SA, Latin America’s largest petrochemicals producer, said a decline in the real would benefit the company because some of its revenue is in dollars, Chief Executive Officer Carlos Fadigas said on Oct. 26

“For the national industry, the higher the dollar gets, the better,” Carlos Fadigas said.

Central bank President Alexandre Tombini said in Sao Paulo yesterday that the world economy is likely to have a prolonged period of slow growth as it recovers from a debt overhang, and that “moderate adjustments” in interest rates are consistent with inflation converging to its 4.5 percent target next year.

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net

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

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