Economic activity in Brazil has exceeded expectations, prompting central bankers to consider another interest rate cut. The Bank of Brazil’s economic activity index showed a 0.44% month-on-month growth in July, slightly higher than the median estimate of 0.40% among analysts. Compared to the previous year, the index increased by 0.66%. However, the growth rate for June was revised downward to 0.22% from 0.63%. These factors, along with the level of economic slack and the neutral interest rate, will be important in determining future interest rates. Analysts believe that the latest activity data supports a 50 basis point rate cut to 12.75% in the upcoming rate meeting.
Despite tight monetary policy, the Brazilian economy has performed better than expected in the past two quarters. Strong demand for services, a successful harvest, and a robust labor market have contributed to this positive performance. As interest rates decrease, analysts are revising their growth forecasts for 2023 to around 3%. President Lula da Silva’s popularity is also increasing due to slowing inflation and increased economic activity. According to a recent survey, 35% of Brazilians believe their economic outlook is improving, the highest number ever recorded.
Policymakers, led by Roberto Campos Neto, are expected to continue the easing cycle with another interest rate cut. The rate was reduced by 1 percentage point to 12.75% in the latest meeting. Price pressures in the service sector have also eased in August, further supporting the case for lowering interest rates. Brazil is among several Latin American countries, including Chile, Peru, Uruguay, and Paraguay, that are implementing monetary policy easing measures. There is no urgency to accelerate the pace of easing, as the costs of tightening interest rates have had limited impact on economic growth.