Brazil's Economy Stalls, Delaying Interest Rate Hike Calls

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Brazil economists bet the central bank will be slower to raise interest rates next year as Latin America’s largest economy got off to a bad start in January.

Economists downgraded Brazil’s 2019 growth estimates for a third consecutive week, to 2.01 percent, while cutting their forecast for the benchmark Selic rate to 7.75 percent at end-2020, from 8 percent previously, according to a weekly central bank survey. The rate currently stands at an all-time low of 6.5 percent and the monetary tightening is now expected to begin in March of next year rather than in January.

In a separate report, the central bank said economic activity shrank 0.41 percent in January, worse than the 0.2 percent decline forecast by analysts. The bank’s economic activity index is considered a proxy for gross domestic product.

A string of disappointing economic data has raised concern about Brazil’s economic recovery following two years of lackluster growth. Some investors even speculate the central bank may signal room for additional monetary easing when it concludes its rate-setting meeting on Wednesday, under new chief Roberto Campos Neto. Uncertainty about the approval of a crucial overhaul of the pension system still hold back bets on additional monetary tightening, however. The Selic is widely forecast to remain at 6.5 percent this time.

Pension Challenge

Failure to approve a pension reform would have a catastrophic impact on the economy, lower house speaker Rodrigo Maia warned on Monday.

“If the pension system breaks, certainly our debt will increase to the point that the market stops buying Brazilian debt,” he said at an event in Rio de Janeiro. “When we no longer have capacity to issue bonds, we’ll print money, and when we do that we’ll return to hyperinflation, which will reduce the real value of everyone’s salaries.”

To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Walter Brandimarte

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