Brazil’s position in the ECR global rankings remains unchanged this quarter as analysts digest the impact of policy-rate hikes on economic growth.
Brazil’s economic assessment deteriorated by 0.5 points, as country experts become more alarmed about the sustainability of the country’s economic growth trajectory and the dangers posed to monetary tightening, along with issues of banking sector stability.
A deteriorating economic outlook and a lacklustre monetary policy had a negative bearing on the country’s economic assessment.
With inflation (IPCA) peaking at 5.8% in Brazil in April and breaching the upper bound of the central bank’s 4.5% target range, analysts have raised the spectre of an aggressive monetary tightening cycle during the coming months, despite political pressure for lower rates to nurture an economic recovery.
The country’s widening inflation gap is a concern to ECR analysts and presents downside risks to the country’s risk profile, according to the latest Q1 results. Brazil’s monetary policy and currency stability indicator declined by 0.1 last quarter, reflecting the central bank’s laagered policy response, while banking sector strength weakened by 0.1 points.
Accelerating inflation and the prospect of policy-rate hikes appear to be also feeding into negative economic growth. Brazil’s economic outlook indicator declined a further 0.1 points in Q1 and a further 0.3 points year-on-year, as ECR contributors remain concerned about the country’s growth trajectory.
The Brazilian economy slowed to 0.9% in 2012, from 2.8% in 2011, which was below the consensus forecast of 2.5% growth.
“The slowdown in Brazil spilled over to its regional trading partners, especially Argentina, Paraguay and Uruguay,” according to the IMF.
The negative impact of Brazil’s slowdown on the sovereign’s trading partners is reflected in ECR data, which shows that five countries in South America suffered from deteriorating economic outlooks in Q1 (see chart below).