SAO PAULO: Brazil's economy is finally recovering after more than a year of frantic government action to revive growth, but the upswing will keep inflation stubbornly high through 2013, a Reuters poll showed on Wednesday.
Now that the economy seems to have turned the corner, Brazil's central bank will probably stop cutting interest rates when it meets next week to avoid fueling even stronger price rises, said most of the 45 economists polled by Reuters worldwide.
Despite expectations that a recovery is under way, economists surveyed in the poll see slower growth for both 2012 and 2013 than was forecast in a Reuters poll in July.
Brazil is expected to grow by 4 percent next year, according to the median of 36 forecasts. While that remains far below the jaw-dropping rate of 7.5 percent in 2010 and is down slightly from a 4.2 percent forecast in July, it would be a sharp rebound from expected growth of 1.6 percent this year.
The 2012 outlook is in line with a recent estimate from Brazil's central bank, reflecting a deeper-than-expected slowdown in the first half of the year.
Looking forward, however, the poll showed that economists see Brazil's economy, the world's sixth-largest and the largest in South America, gaining momentum following a flurry of stimulus measures by President Dilma Rousseff and the central bank.
Brazil, a byword for rapid growth and promising investment opportunities in the past decade, has been spinning its wheels for much of the last year. Manufacturers were hit hard by a drop in global demand and cut back investments amid soaring local costs, leading to prolonged slump in industrial production.
"The turning point is already behind us," said Homero Guizzo, an economist with research firm LCA in Sao Paulo.
Indeed, the poll showed that economists believe that a recovery is already under way. Analysts expect Brazil to grow by 1.9 percent in the third quarter compared with the same period a year before and by 3.1 percent in the fourth quarter, up from growth of just 0.5 percent in the second quarter, according to the survey.
Strong growth is a top priority for highly popular Rousseff, who offered tax breaks to industries, raised trade barriers and pledged to step up government purchases of local goods. Finance Minister Guido Mantega also promised to take steps to keep the Brazilian real at a favorable exchange rate for exporters.
The central bank has chopped its benchmark lending rate nine straight times to an all-time low of 7.50 percent, breaking the taboo of low interest rates in a country with a long history of hyperinflation. Only nine years ago, interest rates were above 26 percent.
Traders are split on whether the central bank next week will make a final rate cut of 0.25 percentage point, to 7.25 percent, yields on interest rates show.
But most economists polled by Reuters -- 28 out of 45 -- expect the bank to keep rates on hold when the central bank's two-day policy meeting concludes on Oct. 10.
"If they cut rates now, they may be forced to hike them next year. I think they will prefer to consolidate the current level rather than testing new lows for rates," Guizzo said.
The poll also showed that economists expect the central bank to leave rates on hold for a while and then raise them slightly in late 2013, to 8 percent, according to the median of 40 forecasts.
As the lagged effects of the recent rate cuts start to take effect, signs of an economic comeback abound.
Industrial output expanded in August at the fastest pace in 15 months, though a bit slower than predicted. The jobless rate hit an all-time low on a seasonally adjusted basis, and retail sales topped forecasts in July.
But inflation has also accelerated.
The rise in consumer prices has remained above the center of the government's target of 4.5 percent over the past two years, and no economist polled by Reuters expected the rate to return to that level through next year.
Inflation will likely end this year at 5.4 percent and will finish 2013 at that same level after peaking at 5.8 percent in the first two quarters, the poll showed.
While the forecasts remain within the government's tolerance band of 2 percentage points, they contradict the central bank view that inflation will eventually converge to the center of the target, though not in a straight line.
"We do not agree with the central bank's approach. Several central bank tools suggest that inflation is converging to 5.0 percent over the relevant time horizon rather than 4.5 percent. We do not see any non-linear convergence at all," said Jankiel Santos, chief economist at Espirito Santo Investment Bank.
If Brazil grows by 4 percent next year, it will catch up with the rest of the region, according to the United Nations' regional economic body ECLAC. It would also narrow the gap to other emerging giants, such as India and China, expected to grow more than 6 percent, according to Reuters polls.
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