BRASILIA--Brazil's central bank on Thursday released its
quarterly economic analysis, downgrading its growth outlook for
this year and forecasting slower, though relatively high inflation
into 2016.
The report was the bank's first since monetary authorities in
May halted a series of rate increases in recent months, keeping key
interest rates unchanged for the first time since April 2013.
Economists interpreted the bank's analysis as signaling key
interest rates will remain at 11%, even as consumer-price increases
hover near the 6.5% maximum allowed under Brazil's
inflation-targeting policy.
"The central bank is saying it has done its part; that now there
is little room to fight inflation with interest rates," Marcelo
Salomon, chief Brazil economist at Barclays PLC in New York, said.
"But it also said that the probability of missing the target is
higher," he added.
Brazil's monetary authority has moved its basic Selic rate
gradually to 11% from 7.25% since April 2013 to tame inflation,
which stubbornly remains at 6.4%.The central bank's official target
for the annual IPCA consumer-price index is 4.5%, with a range of
tolerance of two percentage points either side of that figure.
Although the most recent time the IPCA was 4.5% was in 2009,
Finance Minister Guido Mantega has repeatedly defended the index as
within target.
In its quarterly study, known as the Inflation Report, the bank
on Thursday forecast a 5.1% annual inflation rate by the second
quarter of 2016. The report usually considers a two-year period for
its forecasts.
Many analysts say that the 4.5% target isn't being pursued
anymore, something the central bank denies. But even by the bank's
estimates inflation will remain at the top of the range for a
while. This week, Brazil's economic-policy makers decided to keep
inflation target at 4.5% into 2016.
The bank indicated in its report, however, that there is an
underlying slowing of inflationary pressure in the country,
although it sees "resilient inflation for the coming quarters."
The bank also reduced to 1.6% from 2% its estimate for Brazil's
economic growth this year, pointing to signs of slowing activity in
the manufacturing, building and service sectors.
It also said consumption is showing signs of weakness, while
investment and exports will likely strengthen. But the report
cautioned the consumption outlook "depends on the strengthening of
companies' and families' confidence."
Barclays Mr. Salomon said he fears the central bank's latest
economic assessment is too optimistic. He said he doesn't see
confidence recovering from a recent slump. Though "there may be an
uptick in confidence now because of the World Cup" soccer
championship Brazil is hosting from June 12 to July 13. The
tournament has attracted hundreds of thousands of foreign tourists
to the country.
Mr. Salomon, meantime, forecast a World-Cup hangover for the
economy. "Producers will find themselves with high levels of
inventory and will have to make layoffs...All our indicators point
to a weak investment environment," he said.
He and other economists say the central bank shouldn't have
stopped raising interest rates. The monetary authority "interrupted
the tightening cycle prematurely inasmuch as projected inflation as
far as year-end 2015 remains above the target, even after assuming
lower growth in 2014," economists at Goldman Sachs wrote in a
report. The central bank "is deriving excessive comfort" from the
fact it takes a while for higher borrowing costs to reduce
inflation, the U.S. investment bank said.
Discussing the inflation report with reporters, central-bank
director for economic policy Carlos Hamilton said "conditions have
been created that are more favorable" in terms of inflation
pressure. To economists like Mr. Salomon, "the message is clear:
There will be no rate hikes."
The next interest-rate decision is schedule for July 16, right
after the World Cup final.
-- Priscilla Oliveira contributed in this article.
Write to Paulo Trevisani at paulo.trevisani@wsj.com
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