Economic growth in Brazil is slowing, enabling the country to contain inflation risks and creating long term sustainability, according to financial experts.
Brazil’s central bank said that a slowing Chinese economy and doubts about the strength of the US recovery is helping to fight inflation that’s been above the government’s 4.5% percent target since January.
A drop in the inflation rate and evidence that Latin America’s biggest economy is slowing prompted the central bank to reduce the pace of interest rate increases last week. Policy makers increased the Selic rate by 50 basis points to 10.75%, surprising analysts who expected them to lift it by 75 basis points as in its previous meeting.
‘The economy may have entered in a pace that is more in line with growth levels considered sustainable in the long term, opposed to what was seen in the first quarter,’ the bank said.
In its latest update, the bank also said that although there was a worsening in the inflation dynamic at the start of the year, a sharp improvement on the margin since June has helped.
Consumer prices dropped in the month through to the middle of June for the first time in four years while retail sales and industrial production missed their forecasts in May.
According to Itau Unibanco Holding SA, Latin America’s biggest bank by market value, the central bank is likely to keep the Selic unchanged for the remainder of the year.
It will resume tightening in early 2011 as growth quickens later this year, according to Ilan Golffain, chief economist at the Sao Paulo based bank.
Economists forecast the Selic will jump to 11.75 by the end of the year. They also predict that the economy will expand this year by 7.2%, the fastest pace in more than two decades.
According to Brazil’s finance minister Guido Mantega said that the country’s economic expansion will decelerate from its 9% pace in the first quarter of the year after the government withdrew stimulus tax breaks, cut spending and the central bank started in April to increase the benchmark rate from a record 8.75% low.
Gross domestic product will grow 0.5% to 1% in the second quarter from the first three months of the year, Mantega also said.
Unemployment fell in June to 7% from 7.5% in May, the second lowest rate on record.
Brazil’s monthly inflation as measured by the IGP-M price index rose 0.15% in July. Economists had been forecasting prices to jump by 0.05%. But for the second straight month in a row that Brazil’s broadest price index slowed, after falling to 0.85% in June from 1.19% in May.
Wholesale prices, which have a 60% weighting in the index, rose 0.2% compared with a 1.09% increase in June. While consumer prices also fell 0.17%, the second straight month of deflation, led by a 1.05% drop in food costs.
