The chart above shows that Brazilian GDP growth is clearly declining. While the GDP projections are encouraging, it could also be argued they are a bit unrealistic given the GDP trend over the last three years.
In this period of declining growth, one would expect the Central Bank to lower interest rates thereby encouraging growth. And that is what they have done:
However, Brazil may also have an inflation problem. Consider this chart:
Overall inflation dropped from over 7% in July of 2011 to about 5% in July of 2102. However, since then it has been increasing, and is currently at 5.53%. This is at the upper end of the central banks inflation tolerance range:
Brazilian inflation in December was 5.84 per cent against a year earlier – well above the middle of the central bank’s target zone of 4.5 per cent plus or minus two percentage points – despite economic growth last year that was estimated to have been only about 1 per cent.
And just to make matters worse, the latest inflation projections indicate an potential increase in projected inflation:
The comparison of the trajectories shown in this Report with those released in the previous one – the latter shown in Table 6.3 –, in the baseline scenario, shows an increase in inflation projections for 2012, reflecting inflation rates in recent months higher than the corresponding projections presented in the last Report. In part, these higher rates reflect localized pressures on the prices of agricultural commodities, which have arisen between the second and third quarter of this year, which, however, have moderated recently. Still in the baseline scenario, the inflation projection stays in levels higher than the ones presented in the last Report until the third quarter of 2013. Moves toward similar or slightly lower levels in the succeeding quarters, partially reflecting a less intense domestic activity level than the one considered in the last Report. In the market scenario, the projections stay above values presented in the last Report until the first quarter of 2014, essentially due to the same reasons as well as to the more depreciated exchange rate than the one considered in the last Report. In the following quarters, similarly to what occurs in the baseline scenario, the projections in the market scenario move towards levels similar to the ones considered in the last Report, also reflecting the less favorable dynamics of the domestic economic activity.
