SAO PAULO (Reuters) - Brazil’s central bank acknowledged on Thursday that the economy will grow very little in 2012 and reinforced the case for a long period of low interest rates by forecasting that inflation should ease next year.
The bank lowered its 2012 economic growth forecast to 1.0 percent from 1.6 percent previously, matching market estimates, according to its latest quarterly inflation report.
The bank also lowered its 2013 inflation forecast to 4.8 percent from 4.9 percent previously, contrasting with market forecasts projecting inflation at 5.42 percent.
“The report didn’t surprise me. It underlines the idea of stable interest rates at 7.25 percent for a long period,” said Carlos Kawall, chief economist at J. Safra, in Sao Paulo.
The government targets inflation at 4.5 percent, with a tolerance margin of plus or minus 2 percentage points.
The bank led by Alexandre Tombini said that risks to global financial stability remained high, but Brazil’s domestic demand should continue to support economic growth.
The central bank cut interest rates 10 straight times since August 2011 to a record low of 7.25 percent to help President Dilma Rousseff in her efforts to revive economic growth.
Brazil, one of the world’s most dynamic economies in the previous decade, has been struggling with several bottlenecks after years of chronically low investment levels. Clogged roads, lack of skilled labor and a complex tax system have dragged on local manufacturers, already fighting against a global slowdown.
Brazil’s government on Wednesday announced further measures to boost growth, such as extending payroll tax cuts to retailers and renewing tax breaks on home appliances.
Yields on interest rate futures fell across the board, suggesting traders see a lower probability of interest rate hikes in the years ahead.
However, sticky inflation and a fuel price hike announced on Wednesday by Finance Minister Guido Mantega have raised worries about the bank’s ability to keep borrowing costs stable for a long period as it estimates.
“Forecasts for 2013 inflation are not considering the increase in gasoline prices. I think the government will try to offset this rise by lowering taxes, otherwise this is going to have a reasonable impact,” said Eduardo Velho, chief economist at brokerage Planner, in Sao Paulo.
Consumer prices rose at their fastest monthly pace since May 2011 in the month to mid-December, data showed on Wednesday. Trailing 12-month inflation was at 5.78 percent, and has remained above the midpoint of the government’s target range at 4.5 percent for over two years.
The central bank’s estimate for 2012 inflation was revised up to 5.7 percent from 5.2 percent previously.
The bank also said Brazil’s economy should rebound next year, with estimated growth of 3.3 percent in the 12-month period through the third quarter of 2013.
One year ago, the central bank said Brazil’s economy would grow 3.5 percent in 2012, with an inflation rate of 4.7 percent.
For the central bank's quarterly inflation report, see: www.bcb.gov.br/?RELINF201212
Reporting by Silvio Cascione; Editing by W Simon and Chizu Nomiyama