Brazil’s central bank raised its GDP growth forecast due to low unemployment and increased public spending

He Central Bank of Brazil (BCB) raised its gross domestic product (GDP) growth forecast to 3.2% for 2024as a consequence of low level of unemployment and the boost that the economy of said country received through the public spending. The question for the coming months is how inflation will respond to this booming activity and whether there will be a new rate increase by the monetary authority.

The projection far exceeded the 23% that the BCB itself anticipated in June and also at 3% that private analysts estimate. Likewise, the number was in line with what was expected by the government of Lula Silva.

Low unemployment and government spending have been driving the wages and, with it, the consumption of households, the main component of GDP. In parallel, the investment It also increased in the neighboring country.

However, hot domestic demand could generate an acceleration of inflation which in the first days of September slowed to 4.12% annually but is still above the 3% targeted by the central bank.

Brazil raised rates for the first time in two years

It is worth remembering that Recently the BCB raised the rate for the first time in two years, up to 10.75% annuallywhich is why today investments in Brazilian reals give returns well above inflation.

The market predicts that the upward path in rates will continue in the coming months, until reaching 11.75% at the beginning of 2025, given that the projections of price increases are close to 4.5%, which is the tolerance ceiling of the monetary authority. In addition, investors are closely monitoring the fiscal balance data, which at the same time showed some upward pressure on the country risk from Brazil.

Roberto Campos Netodirector of the BCB, gave no signs regarding a new increase in the cost of borrowing, stating that “giving guidance on rates at this time will not have a positive result.”

Why did the BCB raise rates and how can it impact Argentina?

“The scenario, marked by the resistance of activity, pressures in the labor market, the positive production gap, rising inflation projections and unanchored expectations, requires a more contractionary monetary policy“said the Monetary Policy Committee (Copom) in a statement.

Most analysts expect further increases in the price of food for the next few months due to the droughtas well as increases are also expected in the energy. Meanwhile, the unemployment It is the lowest in the last ten years.

The rise in rates in Brazil could generate an appreciation of the realwhich would be favorable for emerging currencies and would help reduce pressure on dollar quotes in Argentina.