More than any country, Brazil is using all instruments tools to stimulate
economic growth. Yesterday, more steps were given in order to revive the country’
economy: Brazil’ central bank reduced its benchmark Selic interest rate by 50
basis points to 7.5%, a historic low. At the same time, the central bank signaled
another cut might happen in October.
Brazil’s central bank is the first of its peers in the major
economies to start to reduce interest rates sharply in order to fight against its
economy slowdown caused by a previous rate tightening cycle and the eurozone
crises. Just to have an idea, over the past year, the government has lowered
borrowing costs nine times to revive economic growth. The central bank cut the country’s
interest rate by 500 basis points, more than any other group of 20 nations.
The global slowdown has hit Latin America’s biggest economy hard. After
growing 7.5% in 2010 and 2.7% in 2011, Brazil’s GDP might grow just 2.5% this
year according to International Monetary Fund (IMF) growth forecasts. The
country has the lowest growth estimate compared to its peers in the BRICS group—the
major emerging markets composed by Brazil, Russia, India, China and South
Africa.
This week, the Brazilian government had already announced more economic
incentives: a two-month extension of tax breaks for new cars. The measure would
expire this month. The finance minister Guido Mantega also extended to the end
of the year tax relief on white goods such as washing machines, refrigerators, stoves
and dishwashers. The Brazil’s development bank (BNDES) also announced new
credit lines for capital equipment.
The last figures about Brazil’s economy show that the country has been
recovering: retails sales increased while unemployment figures diminished. Retail
sales grew 1.5% in June and vehicle sales surged to 364,196 units in July, the
most since December 2010. At the same time, the central bank indicator for
gross domestic product increased 0.75% in June compared to May, which suggests
stimulus efforts are beginning to flourish.
Brazil’s economy is starting to show the first signs of recovery,
but it is still fragile. While the government is using all its instruments to put
growth on track, the inflation outlook is deteriorating. The central bank has
been reiterating that inflation will slowdown and it will converge to 4.5%
target by the end of the year, but the convergence will not be linear. However,
economists have been increasing their forecasts’ inflation to 5.5% until the
end of the year.
Brazil’s economic recovery can be beneficiated by the expected
stimulus measures from the US Federal Reserve, which will likely help speed up
growth in the biggest economy in Latin America. It’s time to wait and see…
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