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Brazil’s Quickening First-Quarter Growth Fans Inflation Risk

Brazil's President Dilma Rousseff
Brazil's President Dilma Rousseff. Photographer: Nelson Ching/Bloomberg

Brazil’s economy gained speed in the first quarter, challenging President Dilma Rousseff’s efforts to cool growth and bring inflation to its target by next year.

Gross domestic product expanded 1.3 percent in the first quarter from the previous three-month period and 4.2 percent from a year earlier, the national statistics agency said today in Rio de Janeiro. Both figures matched the median forecasts of economists in a Bloomberg survey. Growth in the fourth quarter of 2010 from the previous three months was revised to 0.8 percent from 0.7 percent.

Rousseff’s government aims to damp growth and curb inflation in Latin America’s largest economy by increasing borrowing costs, reducing spending and curbing credit expansion. The measures will slow growth to 4 percent this year from 7.5 percent in 2010, the fastest pace in more than two decades, according to a central bank survey of economists published May 30.

Today’s report shows that “inflation risks remain high” as the economy grows near its full potential, said Zeina Latif, a senior economist with RBS Securities Inc. in Sao Paulo.

Inflation breached the upper-limit of the official target range for the first time since 2005 in April, when prices rose 6.51 percent. The government targets inflation of 4.5 percent, plus or minus two percentage points.

‘Work Ahead of Us’

The central bank raised its benchmark interest rate a quarter of a percentage point to 12 percent in April, after half point increases at its previous two meetings this year. In the minutes of their meeting, policy makers said they would keep raising borrowing costs for a “sufficiently long” period to bring inflation back to the mid-point of its target in 2012.

“We have work ahead of us in order to consistently anchor and bring inflation to the 4.5 percent target,” central bank President Alexandre Tombini said May 19. The central bank’s economic policy director, Carlos Hamilton, said May 20 that the economy will need to slow further to get inflation back to target, requiring “arduous work” and a “big effort” from the central bank.

First-quarter growth was led by a 3.3 percent increase in the agricultural sector, and 2.2 percent growth in industry. The service sector expanded 1.1 percent.

Investment spending rose 8.8 percent from a year earlier, the report said.

‘Moderate’ Pace

Brazil’s expansion has shown signs of slowing since then. Industrial production slumped 2.1 percent in April from March, the biggest contraction since 2008, and consumer confidence fell in May to its lowest level in more than a year. Average real wages fell 1.8 percent in April from March.

Finance Minister Guido Mantega said growth will slow in the second quarter, when measures taken to slow the economy will have their biggest impact.

The economy is growing at a more “moderate” pace than it was last year, Mantega said on a conference call today.

Tombini issued a statement on the central bank’s website saying the figures show the Brazilian economy expanding at “a rhythm that is more consistent with internal and external equilibrium.” Development Minister Fernando Pimentel said he didn’t see a need for further interest rate increases.

Japan Quake

The slowdown may have been caused by temporary supply disruptions such as the earthquake in Japan, Latif said.

“It’s too early to celebrate,” Latif said, speaking by telephone from Sao Paulo.

Consumer spending growth slowed to 0.64 percent in the first quarter from the previous three month period, down from 2.35 percent in the fourth quarter. This could be due to the government’s measures to cool credit growth, or could be a natural moderation from the “excesses” of the fourth quarter, Latif said.

The Bovespa index fell as much as 0.9 percent after a report from the U.S. Labor Department showed U.S. payrolls increased by a less-than-projected 54,000 last month.

The yield on the interest rate futures contract maturing in January 2013, the most traded on the Sao Paulo exchange, fell 2 basis points, or 0.02 percentage point, to 12.47 percent. Traders are betting the central bank will raise borrowing costs 0.25 percentage point at its June 7-8 meeting, according to Bloomberg estimates based on interest rate futures.

The real has gained 47 percent against the U.S. dollar since the start of 2009, the second-best performance among 16 major currencies tracked by Bloomberg after the Australian dollar. The currency appreciated 0.1 percent to 1.5731 per dollar at 1:41 p.m. New York time.

Brazil overtook Italy last year to become the world’s seventh-largest economy, according to the International Monetary Fund.

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