* Central bank's IBC-Br index up 0.75 percent from May
* Strong month suggests government stimulus kicking in
* Central bank chief sees prices under control
* Finance minister urges faster credit growth
By Silvio Cascione
SAO PAULO, Aug 17 Brazil's economic activity
climbed in June at its fastest pace since March 2011, suggesting
that the world's sixth-largest economy has bottomed out after a
yearlong flurry of government stimulus.
While a rebound had been expected by authorities and market
analysts, Brazil's anemic growth had been missing forecasts for
months. Not only did various stimulus measures take many months
to take effect, manufacturers cut back investments to cope with
lower foreign demand and high costs at home.
Now, some economists say the central bank may decide it
doesn't need to cut interest rates much deeper than the current
lows, ev en though its president, A lexandre Tombini, s ees prices
under control in coming quarters.
The Brazilian central bank's IBC-Br economic activity index
rose 0.75 percent in June from May in seasonally
adjusted terms, only slightly above the median forecast in a
Reuters survey, the bank said on Friday.
The index, a gauge of activity in the farming, manufacturing
and services sectors, rose 0.99 percent from the same period a
year before, the bank added.
The IBC-Br is closely watched by economists who regard it as
a proxy for official gross domestic product data.
"From now on, numbers will be better. We're finally seeing
an economic recovery," said Flavio Serrano, an economist with
Espirito Santo Investment Bank.
Surprisingly strong retail sales boosted
Brazil's economic activity in June. After tax breaks went into
effect, consumers sped up purchases of cars, home appliances and
Intent on jump-starting growth, President Dilma Rousseff
went further, acting to curb currency gains, pledging to
increase government purchases of local goods and this week
launching a $67 billion package of road and railway concessions.
Finance Minister Guido Mantega praised the results, saying
that Brazil's recovery "is becoming clearer. " Still, he said
credit growth remains "insufficient," urging state-owned Banco
do Brasil to aim for bolder lending targets to put
pressure on private-sector rivals.
TWO-SPEED GROWTH MAY STOKE INFLATION
Reinforcing the thrust of the government's actions, the
central bank has slashed its benchmark interest rate eight times
over the past year to a record low of 8 percent from 12.5
percent in mid-2011. Yields on rate futures still priced a high
probability of two more cuts this year to 7.25 percent, but some
analysts said that may change soon.
"The market will likely adapt its view to definitely
forecast the Selic rate at 7.5 percent by the year-end," said
Darwin Dib, chief economist at CM Capital Markets, in a note.
Inflation has not been a problem for the central bank this
year as it moved toward the mid-point of the official target of
4.5 percent after reaching a seven-year high of 6.5 percent in
While th e relief in inflation "i s not linear , " prices should
remain under control in coming quarters, c entral bank chief
To mbini reiterated on Friday.
But some economists warn that could change in a country
where growth has historically been accompanied by rapid price
The remaining gap between strong consumer demand and feeble
industrial output, analysts say, may stoke inflation as the
economy gears up in coming months. Brazil's lagging industrial
sector eked out modest growth in June after three
straight months of decline, but remained weak.
Brazil will likely grow less than 2 percent this year, its
worst annual performance since 2009, but will likely expand by 4
percent next year, according to the median market view in a
central bank poll. For some economists, this will push
inflation dangerously close to the ceiling of the government's
target at 6.5 percent.
"Industry has clearly underperformed over the last several
quarters. Industry is more exposed to external conditions, which
are not great. By contrast, parts of the economy which are more
sensitive to domestic demand have outperformed, under credit
expansion, rising wages, and all-time-low unemployment rates,"
said BNP Paribas' economist Gustavo Arruda.
QUARTERLY GROWTH, MONTHLY REVISIONS
Despite June's improvement, Brazil's economic growth eased
in the second quarter from the previous one, according to the
seasonally adjusted IBC-Br index.
Economic activity expanded 0.38 percent between April and
June compared w ith t he prior three months, down from a 0.63
percent gain in the first three months of the year.
The median estimate in a Reuters survey of 18 analysts was
for a rise of 0.7 percent in the IBC-Br for June. Forecasts
ranged from 0.3 percent to 0.9 percent gain.
Previous readings were revised up slightly to show a monthly
fall of 0.01 percent in May and a gain of 0.12 percent in April.
They had been previously reported as a decline of 0.02 percent
in May and a rise of 0.10 in April.
Brazil's statistics agency IBGE will release its official
second quarter GDP figures on Aug. 31.