Brasilia Economic Update

BRASILIA (Reuters) – Brazil's economic activity in August exceeded expectations, as indicated by central bank data released on Monday. This trend supports the view of strong economic momentum, prompting policymakers to initiate a monetary tightening cycle last month.

Members of the interest rate-setting committee at the central bank cited stronger-than-anticipated economic activity as a crucial reason for this decision, which has affected inflation expectations and consumer price indices that remain above target.

The IBC-Br index, a key indicator for gross domestic product, increased by a seasonally adjusted 0.2% in August when compared to the previous month, defying economists' forecasts for a flat reading. The index, which uses proxies for output volume across agriculture, industry, and services, along with tax data, rose by 3.1% compared to August 2023 and 2.5% over the prior 12 months on a non-seasonally adjusted basis.

Although earlier indicators had signaled an unexpected decrease in the services sector, the main driver of Latin America's largest economy, retail sales volumes also fell but by less than anticipated. Meanwhile, industrial output showed slight growth.

Goldman Sachs economist Alberto Ramos commented that Brazil's economy is expected to benefit from fiscal stimulus, wage increases, and improved credit conditions, but this may be countered by tighter domestic monetary policies.

Last month, the central bank raised the benchmark interest rate by 25 basis points to 10.75%. Expectations reflected in the yield curve suggest an increasing pace of rate hikes, with over a 90% likelihood of a 50 basis point rise in the upcoming month.

XP economist Rodolfo Margato predicts that domestic activity will grow at a moderate rate in the latter half of the year after a stronger-than-expected first half of 2024, forecasting a 3.1% GDP growth for this year. The government has also adjusted its GDP growth expectation from 2.5% to 3.2% for this year, up from 2.9% in 2023, supported by a strong labor market enhancing household demand.

However, Finance Minister Fernando Haddad indicated on Monday that the government might need to adjust its forecast again.