June 27, 2019 / 1:16 PM / 5 months ago

UPDATE 1-Brazil's central bank slashes 2019 GDP growth forecast, sees benign inflation

(Adds detail, quotes)

By Jamie McGeever

BRASILIA, June 27 (Reuters) - Brazil’s central bank on Thursday slashed its 2019 economic growth forecast and, assuming constant exchange rates and interest rates, said inflation is likely to be lower than previously expected across its forecast horizon through 2021.

In its Quarterly Inflation report, the central bank blamed spillover effects from the economy’s contraction in the first quarter, persistently weak economic data, and the expected hit to investment from falling business and consumer confidence.

On inflation, the Report largely echoed the minutes of policymakers’ last meeting earlier this month when they held the key Selic interest rate at a record low 6.50%. Inflation is evolving “favorably” but risks surrounding economic reforms are weighing more heavily on policymakers’ minds right now.

The central bank now expects Brazil’s gross domestic product to expand by 0.8% this year, substantially less than the 2.0% it had predicted in its last report in March.

The economy continues to operate with a high degree of slack, reflected in low levels of industrial capacity utilization, and, especially, the unemployment rate,” the central bank said in the report.

Among the most notable forecast revisions from the March report, industrial production growth this year was slashed to 0.2% from 1.8% and export growth was cut to 1.5% from 3.9%, meaning net trade will be a 0.3% drag on overall GDP growth this year.

The new growth forecast is now in line with the broad market view, which has been steadily deteriorating for around four months, although policymakers still expect the economy to recover in a gradual fashion.

Using a variety of foreign exchange rate and interest rate scenarios, the central bank outlined the potential paths for inflation in the coming few years. Assuming constant FX and Selic rates, inflation will likely continue falling.

In the short term, policymakers’ central case is for annual inflation to fall to 3.36% in August from 4.66% in May, and bottom out at around 3.0% some time in the third quarter.

Over the longer-term forecast horizon through 2021, assuming constant FX and Selic rates, inflation is expected to be lower compared with the previous Inflation Report in March, remaining below 4.0% throughout.

“The projected inflation path remains very comfortable,” wrote Alberto Ramos, head of Latin American research at Goldman Sachs in New York in a client note. “We expect the Selic rate to reach a new record low of 5.5% by December and to remain at that level throughout 2020.” (Reporting by Jamie McGeever, Editing by Franklin Paul and Nick Zieminski)

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