Brazil January Economy Surprises Analysts With Second Drop

Brazil’s economy contracted for the second-straight month in January, surprising analysts who forecast an increase and putting pressure on the central bank to ease up monetary tightening. Swap rates fell.

The seasonally-adjusted economic index, a proxy for gross domestic product, decreased 0.11 percent in January from the prior month after a revised 0.57 percent contraction in December, the central bank said Monday in a report posted on its website. The median estimate of 30 economists surveyed by Bloomberg was for an increase of 0.02 percent.

The central bank probably will reduce the pace of interest-rate increases as the economy shows signs of struggling, according to Flavio Serrano, a senior economist at BESI Brasil. GDP has been slow to bounce back from last year’s recession as the government boosts fuel prices, rolls back subsidies and caps spending to avert a credit-rating downgrade.

“It’s quite hard to see a positive reading for Brazilian GDP in the first quarter, and quite hard to see a positive reading for the year,” Serrano said by phone from Sao Paulo. “Activity is very weak and will likely prevent the central bank from going on this tightening cycle much further.”

Swap rates on the contract due in January 2017 fell 2 basis points, or 0.02 percentage point, to 13.77 percent at 9:29 a.m. Sao Paulo time. The real appreciated 0.5 percent to 3.2328 per U.S. dollar.

Economic Slowdown

The non-seasonally adjusted economic-activity index plunged 1.75 percent from a year ago, falling more than all 29 economists surveyed by Bloomberg had forecast. Analysts surveyed by the central bank cut their 2015 GDP forecast for the 11th straight week, to a contraction of 0.78 percent, the central bank said in a report published Monday.

GDP expanded 0.1 percent in the third quarter after shrinking in the previous six months. The national statistics institute is scheduled to publish fourth-quarter GDP data on March 27.

The economic slowdown hasn’t contained consumer prices. Annual inflation in February reached its fastest pace in almost a decade, breaching the ceiling of the 2.5 percent to 6.5 percent target range for the second-consecutive month. Analysts surveyed by the central bank boosted their 2015 inflation estimate for the 11th straight week, to 7.93 percent.

Policy makers have reacted by raising the key interest rate four consecutive times since Rousseff won re-election in October, to 12.75 percent. That is the highest level in six years.

Brazilians are feeling the economic pinch as inflation erodes purchasing power and the unemployment rate surges. More than 1 million people demonstrated in cities throughout Brazil Sunday, with some calling for the ouster of President Dilma Rousseff. The demonstrations dwarfed pro-government marches two days earlier.

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