Brazil’s Economy Grows More Than Expected as Interest Rate Falls

(Bloomberg) -- Brazil’s economic activity grew slightly more than forecast as central bankers are seen extending their easing cycle with a second straight interest rate cut this week.

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The bank’s economic activity index, a proxy for gross domestic product, rose 0.44% in July from the prior month, just more than the 0.40% median estimate from analysts in a Bloomberg survey. From a year ago, the gauge rose 0.66%, according to data published on Tuesday.

Still, June’s monthly growth was revised lower to 0.22% from 0.63%, the central bank reported.

What Bloomberg Economics Says:

Resilient growth has fueled uncertainty on the extent of economic slack and the level of neutral rates — two unobservable variables that are key guideposts for rate decisions. We think the latest activity data reinforces the case for a 50-basis-point rate cut to 12.75% at Wednesday’s Copom meeting, and makes a faster pace less likely.

— Adriana Dupita, Brazil and Argentina economist

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Latin America’s largest economy is defying odds after posting consecutive better-than-expected quarters despite tight monetary policy. Strong services demand, a bumper harvest and a robust labor market pushed activity past most forecasts during the first half of the year. Analysts continue to revise up their 2023 growth estimates closer to 3% as interest rates start to fall.

Read more: Brazil Sees Economy Growing Faster Without Additional Inflation

President Luiz Inacio Lula da Silva’s popularity is growing on the back of slower inflation and stronger activity. Consumer confidence is rising, with 35% of Brazilians saying they see improvements in the economic outlook, the highest number on record, according to a recent Datafolha survey.

Policymakers led by Roberto Campos Neto are expected to extend their easing cycle with another half-a-percentage point cut on Wednesday, lowering interest rates to 12.75%. Closely-watched price pressures in the services sector eased in August, helping the monetary authority’s case.

There’s “no rush” for central bankers to accelerate the easing pace “as the costs of tight rates for economic growth are, thus far, limited,” JPMorgan Chase & Co. analysts led by Cassiana Fernandez wrote in a recent research note.

Brazil is one of a growing group of Latin American nations that’s easing monetary policy, together with Chile, Peru, Uruguay and Paraguay.

--With assistance from Giovanna Serafim.

(Updates with comment from Bloomberg Economics)

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