Brazil Economy in December Contracts Less Than Forecast

Brazil’s economy in December contracted less than economists forecast, as the central bank continues to raise rates in the world’s second-biggest emerging market.

The seasonally adjusted economic index, a proxy for gross domestic product, fell 0.55 percent in December from the prior month after a revised performance of zero growth in November, the central bank said today in a report posted on its website. The median estimate of 32 economists surveyed by Bloomberg was for a decline of 0.85 percent.

Brazil’s economy is showing signs of slowing after it crept out of recession in the third quarter last year. Retail sales and industrial production contracted in December as surging consumer prices and signs of weaker growth abroad put a damper on consumer and business confidence.

“The December result was not as bad as expected, but confirms the deterioration of the activity in the last quarter,” Thais Zara, chief economist at Rosenberg Consultores Associados. “It’s possible that Brazil’s economy contracted last year.”

Swap rates on the contract due January 2017 fell seven basis points, or 0.07 percentage point, to 13.17 percent at 9:43 a.m. local time. The real was little changed at 2.8681 per U.S. dollar.

Year Ago

The non-seasonally adjusted economic activity index rose 0.65 percent from a year ago, compared with a median estimate of a 0.15 percent drop, the central bank reported. The index fell 0.15 in 2014 compared with the previous year, and contracted the same amount in the fourth quarter compared to the previous three months, Zara said.

Economists surveyed by the central bank forecast zero growth this year as inflation accelerates and borrowing costs rise. Gross domestic product expanded 0.1 percent in the third quarter after contracting in the previous six months. The national statistics institute is scheduled to publish fourth-quarter GDP data on March 27.

Standard & Poor’s in March last year cut Brazil’s credit rating to one level above junk, citing deteriorating fiscal accounts and slower growth. Moody’s Investors Service in September lowered the outlook on its Baa2 rating to negative.

In an effort to avert another downgrade, Finance Minister Joaquim Levy is raising taxes and capping expenditures while allowing some regulated prices to rise.

As Levy tightens fiscal policy, the central bank is boosting borrowing costs. Policy makers have raised the key interest rate three consecutive times since Rousseff won re-election in October, to 12.25 percent. That is the Selic’s highest level since 2011.

Inflation in January accelerated to the fastest pace in nearly 12 years while breaching the ceiling of the 2.5 percent to 6.5 percent target range for the first time in two months

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