Brazil growth estimate cut as inflation seen rising

Forecasts for Brazil’s economic growth are being driven lower by its tighter monetary policy and a slowing global economy, a central bank survey showed on Monday, signaling a steeper-than-expected slowdown is looming.

The central bank survey found that forecasts for economic
growth this year fell for a third week to a median 3.84 percent
in the week ended Aug. 19.

Brazil’s economy, the largest in Latin America, is showing
signs of slowing after expanding in 2010 at the fastest pace in
24 years, growth that has led to higher interest rates in a bid
to contain inflation.

While economists in the survey upped their inflation
forecasts for this year for the first time in three weeks,
projections for prices seem to be stabilizing at levels close
to the central bank’s ceiling of the inflation target for the
year.

Finance Minister Guido Mantega on Monday vowed to keep a
lid on budget spending to help tame inflation in an interview
with local newspaper Valor Economico. [ID:nN1E77L03C]

Brazil’s benchmark IPCA consumer price index will rise 6.28
percent in 2011, according to the central bank’s Focus poll,
slightly up from a 6.26 percent forecast the prior week. The
central bank aims for inflation between 2.5 percent and 6.5
percent this year.

Both the decline in growth estimates and the stabilization
of inflation predictions are in line with a rise in borrowing
costs, a tightening of the local commercial lending market and
a deterioration in the global economy that is clouding the
scenario for local investment, analysts said.

“In our opinion, the joint impact of policy tightening
already in the bag and global growth headwinds will entail a
sharper growth slowdown than most observers seem ready for,”
Marcelo Carvalho, senior Brazil economist for BNP Paribas in
Sao Paulo, said in a note to clients.

INFLATION FOR 2012

Reinforcing expectations of slowing growth, the year-end
inflation forecast for 2012 fell for a third week to 5.20
percent from 5.23 percent, the survey showed. The forecast for
inflation in the 12 months ahead slightly slowed to 5.43
percent from 5.44 percent in the prior week, the survey
showed.

Economists in the survey kept unchanged for a second week
their forecast for the year-end level of the benchmark
overnight lending rate Selic at 12.50 percent. Rates are
expected to end 2012 at the same level.

Some economists say rates should be increased further to
drive down inflation quicker to within the target range. Under
Central Bank President Alexandre Tombini’s plan, consumer
prices will only drop toward 4.5 percent — the mid-point of
the government’s inflation target — by the end of next year.

Brazil’s central bank has raised the Selic rate five times
so far this year, by a cumulative 175 basis points to 12.5
percent.

But economists including Carvalho are increasing their bets
on a possible rate cut as early as next month — as signaled by
the yield on the interest-rate future contracts that matures
next month.

The yield on the October contract DIJV1 is trading on
Monday at 12.33 percent — 17 basis points below the current
level of the Selic. The rate futures contracts are widely used
in Brazil as a gauge of the Selic’s future levels.

“We expect the next policy move will be a rate cut, already
in 2011, unlike the consensus view of rates unchanged
throughout the forecast horizon,” Carvalho said.

Government data showed Friday that annual inflation through
the middle of August, measured by the trailing 12-month IPCA
index, accelerated to 7.10 percent — well above the 6.5
percent ceiling of the government’s target range.

Some economists have blamed Mantega’s policies for
exacerbating price increases by boosting government demand for
goods and services.

In the Valor interview, Mantega said that the times of
conflicting fiscal and monetary policies “are over,” signaling
that the government will seek to contain expenses when economic
growth is accelerating.

Brazilian officials will likely continue to struggle with
high inflation in coming months, even as economic growth shows
signs of flattening due to a relatively high consumer debt load
and contagion from the global crisis.

Brazil’s fiscal largess in the past made has it harder for
the central bank to raise interest rates to control inflation,
some of those economists say.