MercoPress. South Atlantic News Agency

Brazil economic activity fell in June for the first time since 2008

Central bank Tombini’s tight money policy seem to be having effect

Brazil's economic activity fell in June for the first time since 2008. The central bank's IBC-Br economic activity index fell 0.26% in June from May the first sequential drop since December 2008, when the global financial crisis plunged major economies into recession.

Economists have been revising down their forecasts for Brazilian economic growth this year amid both a weaker global economy and local factors such as inflation, labour market and government expenditure.

In a report dated Wednesday, Morgan Stanley not only lowered its view for growth in the developed world this year, but also cut its Brazil GDP forecast to 3.7% from a previous 4% this year. For next year, the cut was steeper: to 3.5% from 4.6%.

Brazil's economy is showing strain after the 7.5% surge last year, its biggest jump in 24 years.

But that growth also came with rising consumer prices -- the fastest year-end inflation in six years. The benchmark IPCA has advanced even more since then, above a 6.5% government ceiling since April.

The central bank has now raised interest rates five times -- in every single meeting under bank President Alexandre Tombini, who took office in January -- to lift them to 12.5% from 10.75% this year. But price increases remain sticky, boosted in part by rising salaries amid a tight labour market.

Policymakers face a difficult trade-off: Higher interest rates might rein in those worrisome inflation rates but could also slow economic growth. But not braking inflation would also eat into real gains.

And the lower-income voters who helped propel Dilma Rousseff into the country's presidency last year are keeping a close eye on inflation, interest rates and what economic gains they can expect in her fledgling administration.

Sagging industrial output and retail sales data in recent weeks have fanned worries the economy might be losing steam faster than initially expected.

The Central bank also revised down growth in May from April to 0.05% from a previously reported 0.17%.

According to Barclays Capital economist Marcelo Salomon, the central bank's revisions shaved nearly one-third of a percentage point off growth in the January-May 2011 period.