(Updates to add analyst in fourth paragraph.)
Jan. 31 (Bloomberg) -- Brazil’s industrial production in December rose at the fastest pace in seven months, as a weaker currency and falling interest rates help domestic manufacturers in Latin America’s biggest economy.
Output increased 0.9 percent in December, in line with the median forecast for a 1 percent rise in a Bloomberg survey of 39 economists surveyed by Bloomberg. The December number was the biggest jump since May 2011, when output rose 1.2 percent. Production in December declined 1.2 percent from a year ago, the national statistics agency said in Rio de Janeiro today.
President Dilma Rousseff’s government is cutting interest rates, taxes and loosening lending requirements to boost growth and offset the effects of Europe’s debt crisis. Traders are betting the central bank will cut the benchmark rate by as much as 100 basis points to 9.5 percent by May, according to Bloomberg estimates based on interest rate futures.
“The outlook for Brazil’s industry improved because of the measures adopted by the government,” Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA, said in a phone interview from Sao Paulo.
The 11 percent drop in the real against the dollar since the end of July has provided some relief for manufacturers hit by slowing demand and an increase in imports. Since the beginning of the year, the real has rallied 7.4 percent, the second best performer among the 16 most-traded currencies tracked by Bloomberg after the Mexican peso.
The currency rose 0.7 percent to 1.7365 per dollar at 10:04 a.m. Brasilia time. The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, rose two basis points to 9.53 percent.
Recovery in Sight?
While production has shown signs of recovering, output last year rose 0.3 percent last year, well below the 10.5 percent pace in 2010, when the economy expanded at the fastest pace in two decades.
Car and consumer goods manufacturers serving Brazil’s expanding middle class, who are spending the windfall provided by rising wages and record-low unemployment, fared better last year than import-sensitive industries.
Automotive production rose 2.4 percent last year, while production of textiles plunged 14.9 percent and electronics slipped 3.7 percent as the strong real during the first half of the year fueled demand for Chinese imports.
Looking ahead, production of capital goods, a barometer of future investment, rose 3.7 percent in December. Consumer goods increased 1.5 percent.
“Industrial production will have reasonable growth this year, reducing the mismatch between supply and demand that we saw last year,” said Rostagno, who forecasts output may expand as much as 3 percent this year.
The Brazilian economy contracted in the third quarter for the first time in more than two years, while business confidence in the fourth quarter fell to its lowest level since the start of 2009.
Economists maintained their estimate for 2012 growth at 3.27 percent in a Jan. 27 central bank survey, down from a forecast of 3.3 percent four weeks earlier.
The government has cut taxes on personal loans, home appliances, food staples and foreigner purchases of stocks and corporate bonds tied to infrastructure projects in a bid to bolster demand. It also increased a tax on imported cars to protect local manufacturers from Chinese and South Korean competitors.
The central bank may resume dollar purchases in the spot market and the Finance Ministry may implement new measures to stem a recent rally in the real in a bid to protect local manufacturers, Andre Carvalho, an economist with UBS AG in Sao Paulo, wrote in report yesterday.
Annual inflation slowed for a fourth straight month in mid- January, to 6.44 percent. Brazil targets inflation of 4.5 percent, plus or minus two percentage points.
--With assistance from Dominic Carey in Sao Paulo. Editors: Harry Maurer, Joshua Goodman
To contact the reporter responsible for this story: Raymond Colitt in Brasilia at firstname.lastname@example.org; Andre Soliani in Brasilia at email@example.com
To contact the editor responsible for this story: Joshua Goodman in Rio de Janeiro at firstname.lastname@example.org