(Bloomberg) — Brazil’s economic activity stalled in April according to a report that comes days before central bankers are seen halting their almost yearlong cycle of interest rate cuts.
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The central bank’s economic activity index, a proxy for gross domestic product, ticked up just 0.01% from March, undershooting the 0.3% median estimate from analysts in a Bloomberg survey. It was the second straight time the month-on-month figure was worse than expected. From a year ago, the gauge gained 4.01%, according to data published on Friday.
Investors expect Latin America’s largest economy to slow down following strong performance at the beginning of the year driven by domestic demand. Industrial production fell in April, while monthly retail sales were weaker than expected. On top of that, many companies are still dealing with the impacts of record floods in the south, which impacted 8% of the country’s formal job workers, according to a recent study from the central bank.
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The boost to demand from court-ordered payments earlier this year has passed and tighter financial conditions will likely start to drag on growth. The floods in Southern Brazil may also weigh on activity starting in May. The BCB had expected growth to slow. Policymakers are more focused on the possibility there may be less economic slack than they thought. We think the BCB will hold the policy rate at 10.5% through year-end.
— Adriana Dupita, Brazil and Argentina economist
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Analysts expect policymakers led by Roberto Campos Neto to hold rates steady at 10.5% on June 19. They are worried the institution will become more tolerant of inflation once President Luiz Inacio Lula da Silva names a new governor and two directors later this year after having already named four of nine board members.
This week, Lula reiterated his calls for lower borrowing costs, describing them as a key element to his plans to shore up public accounts. Yet, a pause to rate cuts is likely to hurt both household consumption and business investments, two of the major drivers for economic growth so far this year.
Finance Minister Fernando Haddad’s plans to shore up public finances were jeopardized this week after Congress shot down his latest proposal to increase revenue. Haddad subsequently said the government will review its expenses.
(Updates with Bloomberg economist comments in fourth paragraph)
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