Brazil’s central bank on Wednesday night overlooked weak first quarter economic growth and tightened interest rates more than expected to try to prevent stagflation from worsening in Latin America’s biggest country.
In a unanimous decision, the monetary policy committee increased its benchmark Selic interest rate by 50 basis points to 8 per cent to try to rein in inflation, which is hovering near the upper end of the central bank’s target range.
“The committee believes this decision will contribute to putting inflation into decline and assure that this trend persists in the next year,” the central bank said in a statement.
The move to raise interest rates comes as the government of President Dilma Rousseff is wrestling with slower growth in spite of a series of stimulus measures ranging from tax breaks to subsidies for industry and consumers.
Latin America’s largest economy managed to grow just 0.6 per cent in the first quarter compared with the fourth, missing Bloomberg consensus forecasts of 0.9 per cent, with much of what growth there was coming from a bumper agricultural harvest. Brazil’s Bovespa stock index fell 2.5 per cent on the news and its currency, the real, depreciated 1.7 per cent against the dollar.
Economists had expected the central bank to raise rates only by the minimum 25 basis points after the figures were released. But even more than weak growth, the government is becoming increasingly concerned about persistent inflation, which was at 6.46 per cent in mid-May, near the top of the central bank’s range of 4.5 per cent plus or minus 2 percentage points.
To be sure, Brazil’s economy is not alone in disappointing the forecasters. The International Monetary Fund lowered its 2013 growth forecast for China on Wednesday, from 8 per cent to 7.75 per cent, blaming a weak global economy. This came even as the Organisation for Economic Cooperation and Development warned that emerging markets would have to supply most of global growth again this year.
But while agriculture, which grew 9.7 per cent compared with the previous quarter or 17 per cent against a year earlier, saved the day for Brazil this quarter, it was not enough to disguise increasing cracks in its growth model.
For a decade, Brazil’s centre-left ruling coalition has relied on stoking consumer demand with wage increases and credit to produce growth. But now consumers are losing steam and government efforts to steer the economy towards a greater investment seem to be moving too slowly.
“The 10-year long . . . model of excessive stimulus to consumption and neglect of investment drove the economy to a very poor equilibrium of low growth, high inflation, and very significant loss of external competitiveness,” said Alberto Ramos, economist at Goldman Sachs.
Investment, which rose 4.6 per cent compared with a quarter earlier, did turn out to be the other bright spot aside from agriculture.
The government said these figures were evidence its model was working, and finance minister Guido Mantega attributed the rise in investment to government tax breaks for certain sectors and efforts to drive down interest rates, which hit record lows last year. “Brazil entered 2013 with much higher growth and better quality growth than it did 2012,” he said.
He blamed any weaknesses in the economy on the global environment, saying that other Latin American countries and “even China” were reporting weaker performances this year.
But the figures showed a mixed recovery. Investment in agribusiness rose in anticipation of the record crops. It also increased in infrastructure-related areas with the soccer World Cup and an election due next year. This took the form of investment in trucks and machinery, fertilisers and construction materials. But as the shift to containers to circumvent the ageing port infrastructure suggests, investment is not yet widespread or high enough.
And other sectors are investing more cautiously. Factories are improving existing plants to try to lift productivity and get around a shortage of labour, according to research by Itaú-Unibanco. It says that a business survey it conducted showed a recovery in confidence at the start of the year had weakened after the first quarter.
“Business and consumer confidence are not at highs,” said Ilan Goldfajn, Itaú-Unibanco chief economist.
Most concerning, perhaps, is that the Brazilian consumer, the principle driver of Brazil’s economy, is becoming more cautious. Household expenditure was flat in the first quarter compared with the previous three months and supermarkets, restaurants and other businesses slowed down in April and May, Itaú said.
Mr Goldfajn is forecasting growth will slow during the year to finish at 2.8 per cent compared with a year earlier.
The mixed results for the economy are borne out by those working down in the ports. Maersk’s Mr Gyde said overall seaborne international trade by container increased 1 per cent. But this was dominated by imports, which grew 3.4 per cent compared with a 1.8 per cent fall in exports.
“It’s still import driven,” Mr Gyde said of overall trade. “The industrial and manufacturing sectors are still having some challenges.”
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