By Sarah Brown, Contributing Reporter

RIO DE JANEIRO, BRAZIL – Research from Banco Central (BC, or Central Bank of Brazil) shows that the projected growth of GDP has fallen, while forecasts for inflation rates has increased, indicating a persistent decline in Brazil’s economy. For the seventh week straight, economists at the Banco Central have cut GDP projection growth for 2014 to 1.05 percent from 1.07 percent in the previous week.

Alexandre Tombini, president of Banco Central syas the inflation is under control, photo by World Economic Forum, Flickr/Creative Commons
Alexandre Tombin, president of Banco Central says the inflation is under control, photo by World Economic Forum.

This comes after three weeks of stability, but the deterioration of past predictions emphasizes the continuation of the GDP’s downward trend for this year. Inflation rates based on the Broad Consumer Price Index (IPCA) at the end of 2014 have risen from 6.46 percent in the prior week to 6.48 percent.

The government target for inflation is 4.5 percent with a two percentage point margin either side. The recent increase in inflation pushes the rate closer to the ceiling of the upper inflation limit of 6.5 percent.

The Top 5 de médio prazo (medium term), a group of financial institutions that participate in research of market expectations, predict a worse level of inflation, suggesting a 6.81 percent rate for 2014.

However, the president of Banco Central, Alexandre Tombini, seems unfazed in the rising inflation as he told Brazilian newspaper, O Globo, “There are fifteen years of inflation under control. At the same time, the regime maintains sufficient flexibility to allow adjustments to economic shocks.” Thus suggesting the increasing inflation is and can be controlled.

Banco Central, located in Brasilia, announces GDP growth cut this week for 2014, photo by Tulio Borges Flickr/Creative Commons
Banco Central, located in Brasilia, announces GDP growth cut this week for 2014, photo by Tulio Borges/Flickr Creative Commons License.

In June, according to a recently published report from Banco Central, the official inflation was reduced by 0.4 percent on a monthly basis, yet collectively in twelve months reached 6.52 percent.

The report indicated causes for the change of inflation as identified by The COPOM (Monetary Policy Committee), assigned to an overall increase of inflation in the agricultural sector, as well as wage cost pressures and high changes to consumer price indexes in the past twelve months have contributed negatively to changes in inflation rates.

The price dynamics in the service sector is reflected in the Headline Inflation that reached 8.70 percent compared to that of 8.51 percent in May 2013. The service sector consists of around one third of the consumption basket of the IPCA and contributes significantly to varying degrees of inflation across the economy.

Interest rates that reflect the median forecasts of approximately one hundred financial institutions remain unchanged at eleven percent for 2014, and at twelve percent for 2015. It is expected that the Selic rate of eleven percent will remain the same.

Industrial production worsened, according to Banco Central reports, with economic agents recording a contraction of 0.90 percent this year compared to 0.67 percent last year. Industry growth overall fell from 2.1 percent to 1.8 percent for 2015 predictions.

In the executive summary issued by Banco Central, The COPOM emphasized that the increase in interest rates poses higher risk and depresses investment by shortening the planning horizons of households, firms and the government, as well as being detrimental for confidence in business transactions. Households are also effected with reduced purchasing power and lower consumption, hindering the growth potential of the economy.

The committee have urged that “the monetary policy should remain vigilant” in such times in an attempt to minimize the risks of high inflation rates. A new cycle of monetary tightening is expected to begin only in January 2015.


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