beyondbrics

More mixed signals on Brazilian inflation and growth: today’s weekly market survey from the central bank (as usual, dated Friday but published on Monday) shows inflation expectations rising slightly for the coming 12 months but falling slightly for the current calendar year. The outlook for 2011 remains unchanged.

Commenting on the 2011 outlook, Marcelo Carvalho at BNP Paribas wrote to clients:

Something has to give. Either the central bank’s new dovish stance is right, and inflation expectations should converge to 4.5%. Or else, the BCB is pausing too prematurely, in which case inflation expectations would start to drift higher at some point. The consensus still seems undecided which way it goes.

Ever since the central bank surprised economists with a smaller-than-expected rate increase on July 22, commentators have been scratching their heads about what kind of signals the central bank is sending (the bank called beyondbrics last week to say it was still firmly focussed on meeting the government’s 4.5 per cent inflation target for 2011 after we and others suggested it was lengthening its horizons).

It is not only the central bank’s signals that are raising eyebrows. The economy itself has been behaving strangely, growing at 2.7 per cent in the first quarter (an annualised rate of more than 11 per cent) before falling back to an expected 1 per cent in the second and apparently stagnating since then. Commentators have been casting around for reasons: perhaps the removal of tax breaks in the second quarter, or the policy-induced slowdown in China, to which Brazil is highly correlated because of its commodity exports.

Carlos Alberto Sardenberg, a respected commentator, gave voice to one common conspiracy theory in a newspaper column today entitled “Central Bank and interest rates – still weird”. Like many, he believes the bank – which he praises for almost eight years of unquestionably technical decision-making – may finally have bowed to political pressure as the second Lula administration comes to a close, relaxing monetary policy in the run-up to October’s elections.

That remains to be proven. But while few doubt the long-term trend is for Brazil’s very high interest rates to come down, the short-term outlook is getting increasingly cloudy.

Related reading:
Brazil’s central bank: open to interpretation, beyondbrics
Has Brazil relaxed its monetary policy too fast and too soon?, beyondbrics