Brazil’s central bank cut its growth forecast and said the outlook for inflation, already running above target, is unfavorable as the real posts the largest decline against the dollar among major currencies.
Policy makers, in their quarterly inflation report today, said inflation will reach 6% this year should the benchmark rate remain unchanged at 8%, up from a March forecast of 5.7%. They also cut the 2013 growth prediction to 2.7%, from 3.1%.
President Dilma Rousseff’s administration is trying to steer Brazil’s $2.5 trillion economy out of its second-worst economic performance in 14 years without further stoking inflation. Government efforts have been complicated by the biggest street protests in more than a decade as 1 million people took to the street to press authorities for less corruption, lower prices and better public services. Rousseff vowed to improve health care, public education and transport, while maintaining fiscal austerity in the world’s second-largest emerging market.
“The worsening of family and business sentiment is partially fueled by price increases in segments with high visibility, such as food, fuel and public tariffs,” the central bank said. “In the short term, annual inflation still has a tendency to rise and the balance of risks in the prospective outlook is unfavorable.”
The real weakened 5.8% in the past month, the worst performance amid the 16 most traded currencies tracked by Bloomberg. The currency gained 0.2% to 2.1828 per U.S. dollar at 10:11 a.m. local time. Swap rates on the contract due in January 2015 fell 13 basis points to 9.77%.
Policy makers are stuck between worsening inflation and growth outlooks, said Enestor dos Santos, senior Brazil economist at Banco Bilbao Vizcaya Argentaria SA.
“They repeat that inflation will rise in the short term,” Dos Santos said by phone from Madrid. “At the same time, their growth projections for this year are optimistic because they are above market expectations.”
Annual inflation through mid-June reached 6.67%, the fastest pace since November 2011, even after officials cut energy tariffs and raised the benchmark interest rate this year to cool price increases. Brazil’s central bank targets annual inflation at 4.5%, plus or minus two percentage points.
Inflation prompted central bankers to double the pace of benchmark interest rate increases last month by raising the Selic 50 basis points to 8%. Policy makers had lifted the key rate by 25 basis points in April after holding it at a record low since October.
A weaker currency can fuel inflation by increasing the price of imported goods. The central bank said today the pass- through to consumer prices from a weaker currency has been reduced in the past 10 years.
First-quarter growth decelerated to 0.55% from 0.64% during the last three months of 2012, as family consumption dropped. Brazil’s economy expanded by 0.9% last year, the slowest pace since the aftermath of the Lehman Brothers collapse in 2009.