Brazil Retail Surprises With Big Jump in the Face of High Interest Rates

(Bloomberg) -- Brazil’s retail sales topped all forecasts in May, another sign that consumption is holding up to double-digit borrowing costs and complicating central bankers’ efforts to cool Latin America’s biggest economy.

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Sales increased 1.2% from the month prior, above all forecasts in a Bloomberg survey of analysts that had a -0.5% median estimate. From a year earlier, retail sales increased 8.1%, the national statistics institute reported Thursday.

Policymakers hit pause to nearly yearlong cycle of interest rate cuts last month to counter expectations that inflation will remain above target. But a tight labor market and subsidies provided by President Luiz Inacio Lula da Silva’s government are boosting Brazilians’ spending power in the face of tight financial conditions.

Purchases of clothing, supermarket items and pharmaceuticals were among the top drivers of May’s monthly retail gain. Meanwhile, sales of furniture and fuel fell, the statistics agency said.

Greater access to credit and higher consumer income helped to lift consumption in May. Those gains may prove to be fleeting as interest rates are expected to stay high for the foreseeable future and economic growth fades.

“Tight financial conditions remain the primary threat to the economic recovery, although fiscal aid to households and the relative strength of the labor market will prevent a more dismal picture,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a research note.

--With assistance from Giovanna Serafim.

(Updates with retail report details, context and analysis beginning in third paragraph.)

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