Brazil’s economy in June declined more than forecast as the central bank signals it will maintain interest rates at the highest level since 2006 in the face of a looming recession.
The economic activity seasonally adjusted index, a proxy for gross domestic product, fell 0.58 percent in June from the prior month after rising a revised 0.06 percent in May, the central bank said Wednesday. The median estimate of 34 economists surveyed by Bloomberg was for a tumble of 0.5 percent. Economy dropped 1.9 percent in the second quarter compared to the first three months of the year.
Brazil’s business and consumer confidence levels are at record lows as high rates along with tighter fiscal policy stymie activity. Even with Latin America’s largest economy forecast to post back-to-back years of recession, the government is loath to loosen its purse strings amid the threat of having its credit rating being cut to junk.
“Brazil’s economy has been showing no signs of recovery,” said Roberto Padovani, chief economist at Sao Paulo-based Votorantim Ctvm, by telephone. “The frustration with economic activity is only deepening.”
Swap rates on the contract closing in January 2017 were unchanged at 13.87 percent at 9:35 a.m. local time. The real weakened 0.4 percent to 3.4807 per U.S. dollar.
The non-seasonally adjusted economic index fell 1.2 percent from a year ago, compared with a median estimate of a 1.3 percent drop. In the quarter, the drop was 3.1 percent compared to same period last year, said Padovani.
The country’s economy will contract 2.01 percent this year and 0.15 percent in 2016, according to a central bank survey of analysts published Monday.
The central bank has boosted the key rate in seven straight meetings to 14.25 percent, most recently by 50 basis points in July. Keeping the Selic at the current level for a sufficiently prolonged period is necessary to slow inflation to the 4.5 percent target by the end of next year, the bank’s President Alexandre Tombini said on Aug. 14.
Moody’s Investors Service this month cut Brazil one level to Baa3, its lowest investment grade rating, from Baa2. Standard & Poor’s, which rates Brazil BBB-, or a step above junk, last month cut its outlook on Brazil’s debt to negative.