Brazil Central Bank Warns of Slow Pick-Up in Economic Growth

(Bloomberg) --

Brazil's central bank signaled an acceleration in economic growth will be slow even as a benign inflation outlook clears the way for more benchmark interest rate cuts and the government readies new stimulus.

Gross domestic product was likely stable or slightly positive in the second quarter and growth will probably show “some acceleration” going forward, policy makers wrote in the minutes to their July 30-31 rate-setting meeting published on Tuesday. Plans to allow cash withdrawals from a workers' severance fund should give a boost to the economy, they added.

Read more: With Recession Looming, Brazil's Government to Hand Workers Cash

“Notwithstanding this expected acceleration, the Copom's baseline inflation scenario assumes that the pace of underlying growth of the economy - that excludes the effects of temporary stimuli - will be gradual,” policy makers wrote.

Latin America's largest economy joined countries from Chile to the U.S. by cutting its benchmark interest rate in the face of benign inflation and dwindling growth. Last week's reduction was the first in over a year, and analysts expect the monetary authority to lower borrowing costs by at least another 75 basis points by December.

The minutes predated a trade war escalation which saw the U.S. slap new tariffs on billions of dollars worth of Chinese goods, prompting the Asian nation to respond by letting its currency plunge to the weakest level in more than a decade. Those tensions caused a spike in volatility in global markets and sent assets including Brazil's real tumbling.

International Uncertainty

In an event later on Tuesday, central bank President Roberto Campos Neto said Brazil is able to confront international economic uncertainties, and noted the country's stock of currency reserves and small current account deficit. He said global growth estimates are falling, and there are doubts if advanced economies can lift their inflation rates.

For former central bank director Sergio Werlang, Brazil's easing cycle won't be cut short by the recent increase in tensions between the U.S. and China. Anchored consumer price expectations will allow policy makers to cut rates by an additional percentage point, he said in an interview.

"Only a domestic factor would make them change their plans," said Werlang, who's currently a professor at Fundacao Getulio Vargas.

Brazil's annual inflation in mid-July was almost a full percentage point below this year's target, and analysts surveyed by the central bank see consumer prices below 4% through next year. Still, a weaker local currency may fuel future inflationary pressure by making imports more expensive.

Prospects for easing in Brazil were boosted last month when the lower house of Congress backed a pension overhaul that seeks to save government coffers 900 billion reais ($227 billion) in a decade. That bill will move on to the Senate as soon as this week as soon as the Chamber of Deputies holds a second, mandatory floor vote.

--With assistance from Felipe Saturnino.

To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Walter Brandimarte at wbrandimarte@bloomberg.net, ;Juan Pablo Spinetto at jspinetto@bloomberg.net, Matthew Malinowski