Some Economists Now Believe Brazil Is in a Recession

Interest left unchangedBrazil held interest rates unchanged for a second straight time this week but did not commit to keeping them stable for long as inflation remains high in Latin America’s top economy. The Brazilian economy performance is anemic and next October president Dilma Rousseff is bidding for re-election.

The unanimous decision by the bank’s monetary policy committee to hold the benchmark Selic rate at 11% was widely expected by the market after policymakers ended a year-long tightening cycle at their last meeting.

The bank surprised many in the market by repeating in its decision statement the phrase that it kept rates on hold “at this moment.” Analysts and traders had expected some indication from the bank that rates could stay on hold for a prolonged period.

“Evaluating the evolution of the macroeconomic outlook and the outlook for inflation, the Copom decided, unanimously, at this moment, to keep the Selic rate at 11% per annum, without bias,” the bank said, using exactly the same language of its last decision statement on May 28.

Despite pressure on the bank to hike rates to curb inflation that hit the 6.5% ceiling of the official target in June, policymakers had hinted that they were in no rush to act.

Disappointing growth data is expected to keep the central bank, led by Alexandre Tombini, from raising interest rates for the rest of 2014 even though inflation is expected to stay high for the next two years.

Brazil’s economy has stagnated over the past 12 months and industrial output fell for three straight months through May. Some economists say the economy likely shrank between April and June and that growth in the previous quarter could be revised into negative territory, meaning Brazil could technically be in a recession.

The mix of high inflation and slow economic growth is hurting the popularity of President Dilma Rousseff who will seek a second term in the October 5 general election. Nevertheless, polls show Rousseff remains the frontrunner in the race, though her political rivals are using Brazil’s mounting economic woes to attack the leftist leader.

In recent weeks, the central bank has said that rates at current levels will bring inflation toward the 4.5% center of the official target. The bank has said that previous rate hikes had started to contain prices.

Prices have eased on a monthly basis since March, but 12-month inflation rose to 6.52% in June. Inflationary pressures, however, are expected to remain strong going forward, in part because prices of some government-regulated items, such as gasoline and electricity, are due to go up.

In effect a surge in government spending ahead of the elections and high demand for services will likely prevent inflation from slowing too rapidly this year.

Mercopress

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