Brazil's Industrial Slowdown May Help Central Bank: Week Ahead

By Katia Cortes
June 30 (Bloomberg) -- Brazil's industrial production probably slowed in May, reducing pressure on the central bank to quicken the pace of interest rate increases.
Industrial output data, scheduled for release tomorrow, may show rising inflation is slowing consumer demand by eroding wages. Production growth probably eased in May to 4 percent after a 10.1 percent jump in April, according to the median estimate of 11 economists surveyed by Bloomberg.
``Rising inflation led to a drop in consumer income, so sales and production are slowing,'' Juan Jensen, an economist with Sao Paulo-based Tendencias Consultoria Integrada said in a telephone interview from Sao Paulo. ``Slower output gives a positive sign to policy makers.''
The central bank will raise the benchmark interest rate by half a percentage point in July to 12.75 percent to stem quickening inflation, according to a bank survey of about 100 economists published June 23. Consumer prices jumped 5.58 percent in the 12 months to May, the most since January 2006 and more than the 4.5 percent target for the fifth straight month.
Barclays Capital analysts said earlier this month the central bank may raise rates by three-quarters of a percentage point in July and in September. Policy makers raised rates in April and in June by half a point each time.
President Luiz Inacio Lula da Silva said in a Bloomberg Television interview June 26 in Brasilia his government ``won't allow inflation to come back in Brazil'' and the government would take additional measures to help the central bank rein in inflation if necessary.
Surplus Increase
Lula last month ordered an increase in the budget surplus before interest payments to 4.3 percent of gross domestic product from 3.8 percent to prevent public spending from fueling demand and prices.
Today, Brazil's central bank will release its weekly survey of indicators with estimates of about 100 economists. The National Monetary Council is scheduled to announce the country's inflation target for 2010 and the state development bank's long- term interest rate.
Inflation forecasts by analysts may worsen after consumer prices posted the biggest jump in four years in the first half of June and the central bank forecast the fastest year-end inflation since 2004, Jensen said.
Inflation as measured by the IPCA-15 index rose 0.9 percent through mid-June, up from 0.56 percent a month earlier, the government said June 25. The IGP-M price index, the broadest measure of consumer, construction and wholesale prices, rose 1.98 percent in June, the fastest in more than five years, because of wholesale prices for manufacturers, a June 27 report showed.
Brazilian policy makers said in their quarterly report released June 25 they expect rising food prices and domestic demand to push up the annual inflation rate to 6 percent by year- end. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.
Markets
Last week, the real gained 0.7 percent to 1.594 per dollar, from 1.6057 the previous week. The yield on the government's zero-coupon bond due January 2010 rose 0.2 percentage point to 15.09 percent, according to Banco Bradesco SA.
The benchmark Bovespa index fell 0.5 percent to 64,321.11 points along the week. CPFL Energia, the third biggest Brazilian electricity company, gained 11 percent, while Empresa Brasileira de Aeronautica SA fell 13 percent.
The following is list of events in Brazil this week:

Event Date
Central bank survey 30
Nominal Budget Balance 30
Monetary Council Meeting 30
Industrial Production 01
Monthly Trade Balance 01