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Tags: Brazil | Growth | View | Jobless

Brazil Cuts Growth View as Jobless Rate Falls

Thursday, 22 December 2011 10:50 AM EST

Brazil's central bank slashed its growth forecast Thursday and said a prolonged slowdown in the global economy had decreased inflation risks, bolstering the case for interest rate cuts in Latin America's largest economy.

But a seasonal drop in unemployment was less than economists expected, pushing the jobless rate to a record low in November and highlighting the domestic pressures that have kept inflation above the ceiling of a central bank target since April.

The bank acknowledged in its quarterly report that inflation this year is more likely than not to exceed the 6.5 percent top of its target range, but said a deteriorating global outlook would help bring inflation back to its target despite a recent cycle of moderate interest rate cuts.

"What's interesting is that their methodology seems to have shifted, so they're now considering a worsening international outlook as part of their base scenario rather than just one alternative," said Mauricio Rosal, chief economist for Raymond James in Brazil.

The bank slashed half a percentage point from its estimate for growth in Brazil this year -- now 3.0 percent -- and forecast 3.5 percent expansion in 2012, undercutting President Dilma Rousseff's prediction of growth as high as 5 percent next year.

Finance Minister Guido Mantega acknowledged Thursday the government's 2012 growth forecast could slip as low as 4 percent if the global economy doesn't break its slump. Still, he suggested the central bank's gloom was overdone.

"The central bank is more precise with inflation. We're more precise with growth," Mantega said at a breakfast with journalists in Brasilia.

Even with the dimmer foreign outlook, the central bank held next year's inflation forecast at 4.7 percent, above the 4.5 percent center of its annual target, citing pressures from a tight labor market and robust credit growth.

Brazil's jobless rate fell to an unexpectedly low 5.2 percent in November, nearly half the rate of just five years ago and a stark contrast with unemployment near 20 percent in Spain and Greece.

Evidence of slowing job growth in Brazil earlier this week suggested the jobless rate may rise when workers return to the labor force in late January after the Brazilian summer holiday. With the record low unemployment, workers are demanding steep wage increases, adding to inflationary pressure.

Airport workers started to strike Thursday at Sao Paulo's Congonhas airport, Brazil's busiest, and a union said it would vote on a nationwide strike Thursday night.

"The economy may now be stalling in other areas, but the labor market is still really tight," said Raymond James' Rosal, adding that the jobless data helped explain moderating market expectations for interest rate cuts next year.

Yields on Brazilian interest rate futures contracts <0#DIJ:> rose Thursday as traders pared bets on how deeply the central bank will cut interest rates next year.


The central bank, led by Alexandre Tombini, in August launched a cycle of interest rate cuts that has slashed the benchmark Selic rate 1.5 percentage points to 11 percent .

Since then, 12-month inflation has peaked and subsided, and government data showed stalling economic growth in the third quarter, underscoring the focus on bolstering Brazil against Europe's debt crisis.

Mantega said Thursday that Brazil is likely to take further measures next year to protect domestic industries and the government will inject an additional 950 million reais ($510 million) into state lenders BNDES and Caixa Economica Federal.

The central bank is also unwinding credit curbs to encourage lending and the government offered tax breaks to spur consumption. Rousseff has said she sees room for interest rates to continue falling.

"While the central bank is likely to maintain in the near term a steady pace of rate cuts at 50 basis points per meeting, the scope of the policy stimulus is likely to be broadened significantly beyond the policy rate," Goldman Sachs economist Albert Ramos told clients in a note.

Elsewhere in the region, Chile's central bank moved to ease monetary conditions as the global slowdown weighed on bank lending. The move meant an expected interest rate cut was more likely, according to Chile's finance minister.

Brazil's central bank repeated language in its quarterly inflation report that it has used in recent months, saying moderate interest rate adjustments were consistent with annual inflation converging to the center of its target in 2012.

Economists expected further interest rate cuts to bring Brazil's benchmark rate to 9.5 percent by the end of next year, according to a weekly central bank survey.

The market for interest rate futures reflected expectations of a 92 percent chance the central bank would cut its benchmark rate by 50 basis points to 10.5 percent on Jan. 18, according to Thomson Reuters data.

© 2024 Thomson/Reuters. All rights reserved.

Brazil's central bank slashed its growth forecast Thursday and said a prolonged slowdown in the global economy had decreased inflation risks, bolstering the case for interest rate cuts in Latin America's largest economy. But a seasonal drop in unemployment was less than...
Thursday, 22 December 2011 10:50 AM
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