UPDATE 1-Brazil's central bank watches inflation before next move

Tue Apr 2, 2013 12:50pm EDT

Related Topics

* Careful monitoring of economic scenario - central bank chief

* Not under pressure, ready to act to curb inflation

* Markets bet rate hike will take some time

BRASILIA, April 2 (Reuters) - Brazil's central bank will keep a close eye on the economy to see if there is a need for any action to tame stubbornly high inflation, the bank's chief Alexandre Tombini said on Tuesday.

In a presentation to the Senate's economic affairs committee, Tombini said he expected the recovery of the Brazilian economy to gather strength later this year, but he also warned of inflationary risks ahead.

"The central bank is monitoring the evolution of the economic scenario to evaluate the need for other measures to battle inflation," Tombini said.

He said the central bank will analyze upcoming inflation data for March to decide on future steps.

Annual inflation in the month to mid March climbed to 6.43 percent, dangerously close to the ceiling of the official target range of 6.5 percent. Economists have raised their forecasts for inflation, suggesting policymakers will need to raise interest rates to keep price expectations under control.

Economists disagree, however, on when the bank will hike rates and point to upcoming inflation data as key to determine the timing.

Market traders widely expect the central bank to keep its benchmark Selic rate at the current record lows of 7.25 percent when it next meets on April 17 to avoid disrupting a still timid economic recovery.

Recent economic indicators show the recovery in Latin America's largest economy remains uneven despite a barrage of government stimulus measures that include tax breaks and billions of dollars in cheap credit.

Brazil's industrial output shrank more than expected in February, reversing most of the previous month's gains and reaffirming expectations for a slow recovery in the South American nation.

Weaker industrial production data triggered a fall in Brazil's interest rate futures contracts early on Tuesday, which means the market is betting the bank will wait longer to lift rates in order to support the economy.

Tombini denied the bank is under pressure from President Dilma Rousseff's government to make economic growth a priority and keep interest rates low even if inflation remains high.

He said the bank has already modified monetary policy by explicitly communicating its worries about high inflation and signaling a rate hike is possible if needed. He said the aim of that change in message is to have an impact on inflation expectations.

The central bank has raised its inflation forecasts to more than 5 percent for 2013 and 2014, well above the 4.5 percent center of the target range which has a tolerance of plus or minus two percentage points.

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