Brazil’s Q409 real GDP reading came in roughly in line with market expectations, posting a growth rate of 2.0% quarter-on-quarter (q-o-q) seasonally adjusted – its highest reading in two years. Expectations of a robust headline number for Q4 have previously sent the interbank deposit (DI) futures market higher, amid expectations that the Banco Central do Brasil (BCB)’s monetary policy council (COPOM) will raise interest rates in the upcoming rate meeting this month. With the Q4 number out this morning, the DI January 2010 futures contract rose an additional three basis points (bps) to 10.49% in today’s trading.

Brazil – Real GDP Growth (Seasonally Adjusted), q-o-q

Particularly strong growth in Q4 was registered in the private consumption category, which rose 7.7% year-on-year (y-o-y) from 3.9% in Q309, contributing 4.9 percentage points (pp) to the headline growth number. Gross fixed capital formation, too, impressed on the upside, adding posting its first positive y-o-y reading since Q408 at 3.6% (a more moderate 0.7pp contribution). This means that the Brazilian economy contracted by 0.2% in 2009. My colleagues at BMI currently project a real GDP growth rate of 5.2% for 2010.

That doesn’t mean that the Brazilian economy doesn’t face its fair share of risks this year. Chinese demand for Brazilian commodities is set to moderate in line with expectations of weaker Chinese growth in H210 according to BMI’s Asia desk, which will put downside pressure on Brazil’s real GDP growth rate. In addition, I would expect the net exports contribution to real GDP growth in 2010 to be further weighed down by the increase in imports, which rose 4.6% y-o-y in Q409, following an average contraction of 1.7% y-o-y in the preceding three quarters of the year.

Brazil – IPCA Consumer Price Inflation, %

That said, Risk Watchdog still expects the strong Q409 reading to prompt the COPOM to commence hiking interest rates during the next few rate meetings. Indeed, inflation expectations are beginning to rise, particularly in light of the high January consumer price inflation reading. The IPCA consumer price index rose 0.75% on the previous month in January, its highest reading since May 2008 (click on chart to enlarge). On a year-on-year basis, too, the IPCA index resumed its uptrend in November, and has consistently risen in subsequent months, exceeding the BCB’s 4.5% target in January (at 4.6%).

My BMI colleagues currently expect a total of 250bps in hikes over the course of this year to 11.25%. Market expectations are now beginning to move into the vicinity of 12.00% plus. I see scope for the January 2011 DI futures contract to climb further ahead of the upcoming rate meeting on March 17, though interest rate expectations should moderate slightly once the central bank’s monetary tightening cycle kicks off.