Brazil's July Activity falls More than Expected Ahead of Rate Decision

• Economic activity in Brazil fell by a seasonally adjusted 0.2% in July from the previous month, a central bank index showed on Wednesday, compared with expectations for a 0.1% contraction in a Reuters poll of economists. July marked the second consecutive month of contraction, following a revised 0.9% drop in June.
• Latin America's largest economy has been cooling as elevated borrowing costs weigh on activity. Brazil's central bank has lowered its benchmark interest rate by 25 basis points at each of its last four meetings, bringing it to 14%, but the country's real rates remain among the highest in the world.
• Policymakers will announce their next rate decision later on Wednesday, with economists in a Reuters poll forecasting another 25 bp cut to 13.75%. “The growth data increasingly argue for lower rates; the inflation backdrop argues for getting there gradually,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics.
• The central The Banco Central do Brasil Economic Activity Index (IBC-Br) is a monthly economic indicator that acts as a proxy for GDP, showed that the agricultural sector was the main drag in July, posting a 1.2% decline. Industry fell 0.4%, while services, the backbone of Brazil's economy, were flat. On a year-on-year basis, the IBC-Br index was up 1.1% in July.
• Back-to-back monthly contractions alongside a still-restrictive policy rate keep the easing cycle intact, with the pace of further cuts likely to be set by inflation rather than growth. For investors, gradually falling real rates remain supportive for Brazilian local fixed income, while the earnings outlook for domestically focused companies stays subdued until lower borrowing costs feed through to demand.

(Source: Reuters)