UPDATE 3-Brazil holds rate steady for now, signals tightening ahead

Wed Mar 6, 2013 7:14pm EST

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* Brazil keeps benchmark Selic rate at 7.25 pct
    * Says to monitor macroeconomic scenario before next
decision
    * High inflation takes priority over slow-moving recovery


    By Alonso Soto
    BRASILIA, March 6 (Reuters) - Brazil's central bank held its
benchmark interest rate steady at an all-time low of 7.25
percent on Wednesday, but signaled  policymakers are ready to
hike rates again to rein in high inflation in Latin America's
largest economy. 
    The bank's 8-member monetary policy committee, known as
Copom, voted to keep the Selic rate unchanged for
the third straight time as expected by all the 56 economists
surveyed by Reuters last week.
    Most observers rightly predicted the bank was going to
remove the previous guidance of maintaining rate stability "for
a sufficiently prolonged period" and flag tighter policy ahead
in a bid to keep inflation in check. 
    The central bank said in a statement that the decision was
unanimous after assessing the economic and inflation outlook.   
    "The committee will accompany the evolution of the
macroeconomic scenario until its next meeting, when it will
define the next steps in its monetary policy strategy," the bank
said in the statement. 
    Bets on a higher Selic started to grow in February when
central bank chief Alexandre Tombini said he was "uncomfortable"
with current inflation levels and that the bank will not
hesitate to raise rates.  
    Inflation is moving closer to the 6.5 percent ceiling of the
official target range, raising concerns that price pressures
could not only undermine the recovery, but also the re-election
chances of President Dilma Rousseff next year. 
    An increase in wholesale diesel prices announced late on
Tuesday by state-run oil company Petrobras added
pressure on the central bank to show a firmer stance to battle
inflation. The 5 percent hike in diesel prices could result in
an indirect impact of as much as 0.16 percentage point this year
on inflation, according to Banco Bradesco. 
    "The (bank) showed it will be what we call 'data dependent.'
The next decision will be fully conditioned to data," said
Mauricio Molan, chief economist with Santander. "Our view is
that the bank will not raise rates, but for that to happen the
bank needs to receive good news about inflation from now until
the next meeting."
     The last time the central bank raised rates was in July of
2011 when authorities worried the economy was overheating. 
    Since then the Brazilian economy has taken a turn for the
worse, posting meager 0.9 percent growth last year a despite
barrage of government stimulus measures to revive activity.
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