Brazil’s economy expanded at its fastest pace in eight years in the third quarter of 2004, up 6.1% on the same quarter a year ago and faster than the 5.6% recorded in the second quarter. Having dipped into recession in 2003, the economy is firmly in recovery mode.
President Luiz Inácio Lula da Silva told reporters he was optimistic that South America’s largest economy was on a path of sustainable growth, a belief that many economists share. Successfully managing the business cycle is the job of Henrique de Campos Meirelles, governor of the Banco Central do Brasil, the country’s central bank. His transparent and responsive approach to monetary policy wins him The Banker’s title of Central Banker of the Year for the Americas.
Indeed, growth in the third quarter benefited from interest rates more than 700bp lower than a year earlier, boosting demand for credit. But, as readily as he has cut rates, Mr Meirelles has not hesitated to raise them. Since last September, the central bank has raised the benchmark overnight rate 125bp to an 11-month high of 17.25% in a bid to slow inflation. For the 12 months to the end of October 2004, Brazil’s inflation was 6.9%, up from 6.7% in September and quicker than the government’s year-end target of 5.5%.
Despite the typically long transmission lag between rate hikes and their effects on the real economy, there are already signs of a modest slowdown. Mr Meirelles is undeterred, arguing that an unwavering commitment to keeping inflation in check will help to attract investment, which in turn will fuel growth without price rises.
“The moment the economy is predictable, investments come,” he told Bloomberg last November. “If every investor feels confident, we will keep growing within our capacity, then they will feel confident to invest more.” Mr Meirelles believes that, even at current levels, Brazilian borrowing costs remain low enough to keep the economy growing.
Economists have generally welcomed the interest rate hikes, saying they will not inhibit growth or investment but will work to cool demand and avoid production bottlenecks. Growth of 3.5% is forecast in 2005, a level that is unlikely to trigger significant inflationary pressure.
