Brazil Forecasted for Sub-1% Growth and More Rate Cuts This Year

(Bloomberg) -- Economists cut Brazil’s 2019 growth forecast below 1% for the first time and slashed their key rate outlook to the lowest on record, as the central bank prepares to hold its monetary policy meeting amid a weak economy.

Gross domestic product will grow 0.93% this year, down from last week’s estimate of 1%, according to the central bank’s weekly survey posted on its website Monday. Economists expect the monetary authority to cut its benchmark interest rate to 5.75% by the end of this year, down from last week’s forecast of 6.50%.

Financial market concerns are mounting as President Jair Bolsonaro’s administration struggles to spark growth in Latin America’s largest economy. High unemployment is undercutting consumer demand, while political spats and uncertainty over the government’s market-friendly proposals including a pension reform are weighing on investments. Analysts slashed their forecasts on the eve of the central bank’s rate-setting meeting on Wednesday.

“Chances of a key rate cut are really increasing, but only after clearer signs on pension reform,” said Mauricio Oreng, a Brazil senior strategist at Rabobank. “There are also odds of weak growth in the second quarter.”

Swap rates on the contract maturing in January 2021, which indicate market expectations for monetary policy, fell 4 basis points to 5.98% in morning trading.

All but one of the 27 economists in a Bloomberg survey expect the central bank board, led by its President Roberto Campos Neto, to hold borrowing costs at the current all-time low of 6.50% this week. In the minutes to their last policy meeting, the bank board wrote that their base outlook includes a steady key rate.

Still, investor are increasing bets on lower borrowing costs this year as the Brazil’s economic recovery falter and central banks around the world rush to support their economies in the face of slower global growth. This month, Chile’s central bank stunned investors with its largest key rate cut in a decade, while both the European Central Bank and U.S. Federal Reserve have signaled willingness to bolster demand.

Read more: Brazil Central Bank Pressured to Align Rates Message With Market

In Brazil, a key gauge of economic activity fell in April after the country’s GDP contracted in the first quarter for the first time since 2016. Meanwhile, the central bank survey published Monday showed inflation expectations falling further below target this year while remaining at policy makers’ 4% goal in 2020.

There will be no middle ground for the central bank in its upcoming decisions, according to Bloomberg economist Adriana Dupita. Either it holds the key rate because 2020 inflation expectations have not yet fallen, “or it cuts the rate significantly enough to ignite a stronger recovery.”

To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Walter Brandimarte at wbrandimarte@bloomberg.net, Matthew Malinowski

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