Brazil: from swan to ugly duckling

It has been difficult for Brazil to change from an ugly duckling into a beautiful swan, economically speaking. The country might grow less than all the others major emerging markets which compose the BRICS’ economies (acronym for Brazil, Russia, India, China and South Africa).

The Brazilian central bank, in its quarterly inflation report today, announced a reduction in its growth forecast for 2012 while the bank increased its estimates to inflation. According to the bank, the forecast for inflation rose to 5.2% this year, from 4.7% in the June report. On the other hand, its forecast for Latin America’s biggest economy this year decreased to 1.6%, from 2.5% in June.

This means that the forecast for the Brazilian economy this year is lower than the 2.15% expected in the U.S. and 2.5% in Japan. After growing 7.5% in 2010 and 2.7% in 2011, the global slowdown has hit Latin America’s biggest economy hard and Brazil has been struggling to put its economy on track again. The country has the lowest growth estimate compared to its peers in the BRICS group.

Brazil’s central bank believes, however, the economy will heat up in the next months and the gross domestic product (GDP) should grow 3.3% in the second quarter of 2013.

In the last months, Brazil has been using all kinds of monetary instruments to revive its economy. Brazil’s central bank has been reducing interest rates sharply in order to fight against its economy slowdown. Over the past year, for instance, the government cut the country’s interest rate by 500 basis points, more than any other group of 20 nations. The Brazilian benchmark Selic interest rate is 7.5%, a historic low level.

The efforts to revive the economy, nevertheless, have been creating another problem: inflation. According to the Brazilian central bank, the efforts to revive growth through tax breaks and spending increases are contributing to inflation which reduces the room for additional monetary stimulus.

The central bank said the fiscal policy is moving from a “neutral to slightly expansionary position” and any future rate cut must be carried out with “maximum parsimony”. As a result, traders immediately reinforced bets that the Brazilian policymaker will not cut interest rates at their next meeting in October.

Brazil has to pay huge attention to prices’ stability since the country had a painful period of hyperinflation. In 1990, for instance, Brazil’s inflation rate was about 3000%. It is unquestionable that measures have to be taken by Latin America's biggest economy to revive its growth, but the price stability can't be jeopardized.