REFILE-UPDATE 2-Brazil's Tombini keeps cautious tone, rates to hinge on economy

Mon Apr 8, 2013 10:28pm EDT

* Central bank chief reiterates it's ready to raise rates

* Tombini under pressure to raise rates to curb inflation

By Alonso Soto

PORTO ALEGRE, Brazil, April 8 (Reuters) - Brazil's central bank will monitor the evolution of the economy before it decides whether it needs to raise interest rates to battle inflation, the bank's chief, Alexandre Tombini, said on Monday, striking the same cautious tone of recent weeks.

Tombini repeated that naggingly high inflation is a concern for policymakers but that "lingering uncertainties" have made the central bank careful about raising interest rates. That message was interpreted again as an indication that interest rates will remain unchanged when the bank's monetary policy committee meets on April 17 to avoid slowing an already timid economic recovery.

"Actions were taken but it is plausible to say that others may be necessary. To decide this, the central bank will monitor the evolution of the macroeconomic scenario," Tombini said at a university conference in the southern city of Porto Alegre.

Tombini is under growing pressure to raise the Selic rate to battle inflation that likely pierced the official target ceiling of 6.5 percent in March.

The market is betting the central bank will again refrain from tightening monetary policy this time around to keep rates at a level that further stimulates the recovery in Latin America's largest economy.

"Tombini will not raise rates now," said Andre Perfeito, chief economist with Gradual Investimentos in Sao Paulo. "Economic activity remains weak, the local stock market continues to fall and you have a big trade deficit that could further strengthen the real. I don't see interest rates resolving all of those issues any time soon."

The yields of Brazilian interest rate futures are indicating a 55 percent chance of the bank keeping the Selic rate steady at 7.25 percent at its next meeting, and a 45 percent chance of it raising the rate to 7.50 percent, according to Thomson Reuters data.

Tombini again stressed that the bank has changed the course of monetary policy by openly saying it is worried with inflation levels. He added that the bank's exclusive focus is to maintain price stability.

Annual inflation in the month to mid-March climbed to 6.43 percent, close to the 6.5 percent ceiling of the official target range. Inflation probably breached that target for the first time in over a year, according to a Thomson Reuters survey of economists.

Prices keep climbing in Brazil while the economy remains sluggish despite an avalanche of stimulus measures implemented by the government of President Dilma Rousseff.

For more than a year the Rousseff administration has cut interest rates, granted tax breaks, opened up infrastructure concessions to private entrepreneurs and granted billions of dollars in cheap loans to help local businesses.

However, the recovery remains uneven, with domestic demand still strong but private investment remaining anemic. This has been the main drag on an economy that slowed sharply to 0.9 percent growth in GDP last year from red-hot expansion of 7.5 percent in 2010.

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