Inflation to be Higher Than Expected

By Sibel Tinar, Contributing Reporter

RIO DE JANEIRO – The Banco Central do Brasil announced last week that it has raised its forecast for the country’s GDP (Gross Domestic Product) growth from 5.8 percent to 7.3 percent for this year, indicating the fastest expansion of the Brazilian economy since 1986 when the growth was recorded at 7.5 percent.

The official figures released in June show the GDP growth to be 2.7 percent in the first quarter of 2010 compared to the previous, itself a nine percent increase from the same period in 2009. The construction sector is expected to lead the growth with a projected rate of 13.3 percent, followed by industry with 11.6 percent, and trade with nine percent.

The policy makers at Central Bank say that this increase in growth projections is in line with results reported in the first half of the year, reflecting a general improvement in activity from both production and demand perspectives. “The activity is still being driven mainly by domestic demand, with emphasis on rapid growth of investments, consistent with the high levels of business confidence and capacity utilization”, said the report, adding that the financial crisis in Europe that has been weighing on the Brazilian economy still continues to be a cause for concern.

In their Quarterly Inflation Report, Banco Central also announced that consumer prices are expected to rise 5.4 percent, up from the 5.2 percent previously reported, pushing inflation further above the government’s target of 4.5 percent for the year. This forecast for higher inflation has led to falling Brazilian stocks, while the Brazilian Real strengthened by one percent against the U.S. Dollar.

The monetary authorities, who have been prioritizing economical growth above stricter control of inflation in 2010, are expected to rein in inflation in 2011 by means of adjusting the SELIC rate, which is Banco Central’s overnight lending rate.

Brazilian monetary policy makers have recently come under criticism for allowing record lending at the expense of increasing public debt and putting a burden on Banco Central to curb the inflation. BNDES (Banco Nacional de Desenvolvimento Econômico e Social), Brazil’s national development bank, has lent over R$46 billion ($26 billion) in the first five months of the year,  a rise of 41 percent.

The president of BNDES Luciano Coutinho has responded to mounting criticism by emphasizing that such lending is essential to increase investment and boost production, which in return will help stabilize the prices.

“Going forward, our expectation is to share the burden between BNDES and the market,” Coutinho said, “but we need to do that gradually. If BNDES pulls out abruptly, the cost of capital for investment will increase a lot.”

Carlos Hamilton, the economic policy director of the Banco Central has expressed his confidence that Brazilians would have better access to credit and might see an increase in disposable income this year. Stating that a need to reduce the inflation rates today was not as critical as it used to be before, Hamilton said: “Brazilian monetary policy is more effective as credit expands.”