Brazil’s economy grew more than expected in June in a sign of the resilience of Latin America’s largest economy, despite an aggressive monetary tightening campaign that has so far failed to contain inflation expectations.
The central bank’s index of economic activity, a benchmark for gross domestic product, rose 0.69% from May, more than the median estimate of 0.35% of economists surveyed by Bloomberg. Compared to a year ago, activity increased 3.09%, the bank reported on Monday.
Brazil’s economy has shown signs of dynamism, with the labor market performing better than expected, even after the central bank raised its benchmark interest rates by 11.75 percentage points from March 2021, to 13, 75%. The recently implemented measures to lower inflation are expected to further support domestic demand.
Ahead of presidential elections in October, President Jair Bolsonaro got the green light for a multimillion-dollar social program that raised 200 reais in cash for the poor by the end of the year. He has promised to keep that extra pay if he is re-elected, as is his main rival, former President Luiz Inácio Lula da Silva.
The outlook for additional social spending keeps inflation expectations above target through 2024. Economists surveyed by the central bank raised their estimates for 2023 for the 19th consecutive week, to 5.38%. They project that prices will rise 3.41% in 2024.
Monetary policymakers, led by Roberto Campos Neto, said they will now give more emphasis to inflation estimates for early 2024, as their current horizon was “strongly affected” by recent tax cuts in money prices. gasoline. They also pointed to upside risks to their price outlook if the fiscal stimulus becomes permanent. Inflation is forecast to hit 7.02% by the end of 2022.
Although central bankers said they would consider a minor tightening in September, most analysts believe the tightening campaign is over. The key Selic rate is expected to remain at 13.75% this year and fall to 11% in December next year.