Brazilian economy shrinks 0.5 percent amid high inflation, rising interest rates

125px-Flag_of_Brazil.svgThe Brazilian economy shrank more than expected by 0.5 percent in the third quarter—the largest decline since 2009, resulting from above-target inflation and rising interest rates.

Economists forecast a 0.3 percent drop, following a revised 1.8 percent increase in the second quarter. Earlier this year, the Brazilian government attempted to encourage growth by extending tax cuts to drive demand for goods and by providing subsidized credit to businesses, Bloomberg reports.

“The central bank cares about growth, and these very negative figures should affect their decisions,” Enestor dos Santos, the principal economist at Banco Bilbao Vizcaya Argentaria, said, according to Bloomberg. “There’s going to be a very dovish impact.”

The 2.2 percent decline in investment during the third quarter indicates that the government’s artificial stimulus in the second quarter was not lasting. While growth contracted, Brazil’s central bank continued to raise rates to combat above target-inflation, raising the benchmark Selic to 10 percent.

“The increase of the Selic certainly had some impact on growth this year, because real interest rates are higher for investors and consumers,” Finance Minister Guido Mantega said, Bloomberg reports. “However, our interest rates are still at reasonable levels relative to Brazil’s norm.”

Growth is expected to increase to 2.5 percent this year from a revised one percent last year—approximately one-third of China’s rate and half of India’s. Next year, analysts forecast a 2.4 percent expansion.

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