(Bloomberg) -- Brazil’s economy unexpectedly grew for a third straight month in October, withstanding high interest rates that the central bank has continued to increase as it battles accelerating inflation.
The monetary authority’s economic activity index, a proxy for gross domestic product, rose 0.14% from September, above the 0.2% decline analysts estimated in a Bloomberg survey but still below the 0.88% growth recorded in the prior month. From a year ago, the gauge rose 7.31%, according to a report published Friday.
Latin America’s largest economy is closing yet another year of better-than-expected growth, with most analysts betting gross domestic product will expand more than 3% in 2024. Families are increasing consumption amid record-low unemployment and higher government spending, although the strength of domestic demand is also causing inflation expectations to skyrocket.
Central bankers led by Roberto Campos Neto lifted rates to 12.25% this week and pledged two additional hikes of the same magnitude as they fight to bring inflation back to the 3% target.
Stronger-than-expected activity has tilted inflation risks upward and put policymakers on alert for the impacts of higher services costs and a weaker currency. The economic scenario demands even more restrictive rates, central bankers said this week, as they promised to take the benchmark Selic to 14.25% by March.
What Bloomberg Economics Says
“Brazilian activity increased more than expected in October, though growth still slowed from the prior month. The data could flag slightly stronger GDP growth for the year than our 3.5% forecast.
— Adriana Dupita, Brazil & Argentina economist
Click here to read the full report.
Analysts at Goldman Sachs Group Inc. revised up this year’s growth estimate to 3.5% after the data, citing a resilient economy, strong labor market and robust disposable income for households.
“Going forward, we expect the pace of real activity to continue to benefit from fiscal stimulus, generous increases in the minimum wage, and solid real household disposable income growth,” Alberto Ramos, director for Latin America at Goldman Sachs, wrote in a report.
President Luiz Inacio Lula da Silva’s government is delivering on its pledges to lift living standards for the poor, and recently announced new income tax breaks for families earning less than 5,000 reais ($833) per month.
But that plan dented the impact of an austerity package that calls for cutting 70 billion reais in spending, fueling investor skepticism about Lula’s commitment to shoring up public accounts.
Pessimism about Brazil’s fiscal situation has had a significant impact on estimates for consumer price increases, the exchange rate and the country’s risk premium, policymakers said this week, adding that they are now facing a “more adverse” inflation dynamic.
(Updates with comments from economists starting in sixth paragraph.)
©2024 Bloomberg L.P.