Brazil Economic Activity Tops All Forecasts, Backing Rate Hike Warning

(Bloomberg) -- Brazil’s economy grew much more than expected in June as central bankers warn that stronger demand and above-target inflation could force them to hike interest rates again.

The central bank’s economic activity index, a proxy for gross domestic product, rose 1.4% from May, above all estimates in a Bloomberg survey that had a 0.5% median forecast. From a year ago, the gauge gained 3.2%, according to a report published on Friday.

For months analysts have gradually raised their estimates for growth in Latin America’s largest economy, with most betting gross domestic product will expand over 2% this year despite high rates. In June, industrial output jumped the most since 2020 and services volume beat estimates. On the other hand, retail sales dropped for the first time since December.

What Bloomberg Economics Says

“June activity data show Brazil’s economy beat growth expectations in the second quarter despite tighter financial conditions and intense floods in the south. That will likely keep the central bank on alert for signs of overheating, but alone won’t secure an interest-rate hike, in our view. We still see policymakers holding the Selic at 10.5% through mid-2025. But with strong activity and an uptick in underlying inflation, a hike isn’t entirely off the table.”

— Adriana Dupita, Brazil and Argentina economist

Policymakers led by Roberto Campos Neto held the benchmark Selic at 10.5% last month, saying they won’t hesitate to raise rates if needed. Annual inflation hit the ceiling of the bank’s tolerance range in July, at 4.5%, as services costs jumped and core measures stripping out energy and food items picked up.

Economic activity “keeps surprising us on the upside,” Campos Neto said Friday at an event in Sao Paulo, adding that analysts who now see the economy growing at 2.2% this year are likely to revise those estimates above 2.5%.

“In the process of lowering rates we discovered the economy was stronger than anticipated, even with high rates,” Campos Neto said.

Central bank Monetary Policy Director Gabriel Galipolo has said all options are on the table at September’s rate-setting meeting, as demand stays firm and unemployment remains low. Board members are monitoring price threats including service costs, rising inflation forecasts and the currency.

Campos Neto on Friday reaffirmed that the bank won’t give guidance on its next rate move, but will do “whatever it takes” to bring inflation to target.

“If hikes are necessary, we will do it,” he said.

President Luiz Inacio Lula da Silva, who often criticizes high rates as an obstacle for growth, is expected to soon name a replacement for Campos Neto, whose mandate as central bank governor ends in December. The leftist president is trying to bolster the economy through public spending, arguing the monetary authority needs to consider activity levels and not just inflation.

--With assistance from Giovanna Serafim.

(Adds comments from Campos Neto from fifth paragraph)