Brazil’s Higher Inflation Leaves Little Room for Interest Rates Cuts

Brazil currency Consumer prices in Brazil rose faster than expected in the month to mid-July on higher food costs, suggesting the central bank may have less room than previously believed to cut interest rates much further.

Brazil’s central bank has slashed interest rates in eight straight meetings to a record-low 8% in an effort to stimulate the country’s faltering economy.

Brazil’s benchmark IPCA inflation index rose 0.33% in the month to mid-July, government agency IBGE said on Friday, up from 0.18% in the previous reading.

Twelve month inflation rose to 5.24% from 5% in the previous month. Although it still sits comfortably within the government’s target of 4.5% plus or minus two percentage points, it was the first rise for the mid-month inflation index since September.

That could strengthen the case for the central bank to stop cutting rates soon. The bank led by Alexandre Tombini signal led in minutes published on Thursday that at least one more cut should follow in August to prop up economic growth.

Yields on interest rate futures rose after the data was released suggesting traders see a higher likelihood that the central bank will stop cutting rates in August.

Food prices rose 0.88% after a 0.66% gain in the previous reading. Grain and soybean prices have jumped in global markets as the United States struggles with its worst drought in over 50 years.

Personal expenses like housekeepers’ salaries also pressured the index, gaining 0.92% from 0.34% in mid-June. Transportation prices fell 0.59%, after declining 0.77% in the month to mid-June.

Brazil’s anaemic pace of growth had been keeping a lid on consumer prices, which had risen at their fastest pace in seven years in 2011. Its once-booming economy is expected to grow this year at the slowest pace since the global credit crunch in 2008-2009, eking out a pace of growth comparable to struggling developed nations such as Japan.

From 4.5% to 3%

The Brazilian government said Friday it was cutting its economic growth forecast for this year from 4.5% to 3% due to the impact of the global slowdown. However the figure is still higher than the 2.5% predicted by the Central Bank.
 
“On the international stage, the most recent decisions made by European leaders dispelled the risk of a banking crisis in the short term, but the absence of growth and the reduction in trade still prevail in the advanced economies,” the planning ministry said in a report.

“Brazil is prepared and in a better position compared with the major countries… But even our country was affected by this deterioration of the international situation.”

In the first quarter of the year, the GDP of Latin America’s largest power grew only 0.2% compared with the previous quarter and only 0.8% when compared with the same period of 2011. Last year Brazil’s economy, now the sixth largest in the world, grew only 2.7% after a strong 7.5% in 2010.

Over the past few months, the government has taken a series of steps to stimulate the economy and boost growth, including lowering taxes and bringing the base interest rate to a historic low of 8% to spur domestic consumption.

“The recovery of growth occurs gradually, given that some various stimulus measures adopted by the authorities have yet to fully affect economic activity,” the report said.

However, the government predicted that growth will accelerate in the second half of 2012, boosted by its stimulus packages.

The IMF earlier called on Brazil to increase productivity and rebalance domestic demand “from consumption to foster saving and provide space for investment.”

Mercopress

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