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Economists said strong retail demand should not derail expectations for a ninth interest rate cut later this month by the central bank, as Brazil’s manufacturing sector continues to struggle. (BRUNO DOMINGOS/REUTERS)
Economists said strong retail demand should not derail expectations for a ninth interest rate cut later this month by the central bank, as Brazil’s manufacturing sector continues to struggle. (BRUNO DOMINGOS/REUTERS)

Brazil’s shoppers take leap of faith Add to ...

Retail sales in Brazil posted a surprising jump in June, evidence that the country’s consumers remain ready to support a broad economic recovery in coming months.

Consumers responded to a flurry of government incentives by speeding up purchases of home appliances, furniture and computers. Tame inflation and rising wages also supported supermarket sales, which many analysts had expected to drop.

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Economists said strong demand should not derail expectations for a ninth interest rate cut later this month by the central bank, as Brazil’s manufacturing sector continues to struggle with low investment rates and smothering costs.

Retail sales volumes rose 1.5 per cent in June from May, government statistics agency IBGE said on Thursday.

The median forecast in a Reuters poll of economists was for a drop of 0.3 per cent. The most upbeat of the 24 analysts polled expected sales to rise 0.75 per cent.

“It’s obviously a very good indicator, though it’s just a one-time number. It shows that demand responded to the stimulus provided by the government,” Ines Filipa Pereira, chief economist at ICAP Brasil, said in Rio de Janeiro.

Private data from Brazil’s national supermarket association pointed to weak sales in the sector, which make up more than half of Brazil’s retail index. But supermarket sales rose 0.8 per cent in June from May, according to IBGE.

A broader measure that includes sales of motor vehicles and building materials soared 6.1 per cent in June from May after tax breaks to boost car sales.

The world’s No. 6 economy has relied on its 200 million consumers to avoid a recession in the past few quarters.

As Brazilian manufacturers cut investments to cope with lower foreign demand and high costs at home, Brazilian President Dilma Rousseff’s government deployed a series of stimulus measures, from targeted tax breaks to steps to curb the rise in Brazil’s currency, the real.

On top of that, the central bank has slashed interest rates eight times over the past year to a record low of 8 per cent. Analysts expect the bank to cut rates at least twice again this year, to 7.25 per cent, with a 0.5-percentage-point cut expected later this month.

While some economists argue that Brazil’s consumer-based model has shown signs of exhaustion, authorities hope strong demand could drive up investments in local production and lead to another cycle of economic growth.

After the sales report, Finance Minister Guido Mantega said he expected the Brazilian economy to expand at an annual rate of about 4 per cent by the end of the year.

Official data showing a rise in job growth in July hinted at further improvement in Brazil’s consumer market last month, with a net 142,496 payroll jobs added. That was a rise from June and from the same month a year before.

Yields on interest rate futures jumped after the retail sales data were released, signalling that traders see less chance of an extended cycle of interest rate cuts.

The implied probability for a 0.5-point cut this month, however, remained around 80 per cent.

“Even though we are seeing such strong retail sales, Brazil’s industry remains depressed by the European crisis and China’s slowdown,” said Luciano Rostagno, chief economist at WestLB in Sao Paulo.

June’s retail sales rose 9.5 per cent from the year-earlier period, the IBGE said, more than the 6.5-per-cent median estimate in the Reuters poll. Forecasts ranged from 5.5 per cent to 8.7 per cent.

IBGE revised upward the rise in May retail sales from a year earlier to 8.3 per cent, compared with a previously reported 8.2 per cent.

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