UPDATE 3-Brazil declares war on inflation, signals rate increase

Fri Apr 12, 2013 4:21pm EDT

* Central bank chief, finance minister signal rate rise

* Yields on rate futures jump after their comments

* Tombini says bank to "closely monitor" indicators

* Gov't may make unpopular moves to tame prices - Mantega

By Bruno Federowski and Walter Brandimarte

SAO PAULO/RIO DE JANEIRO, April 12 (Reuters) - Brazil's top two economic policymakers warned on Friday that high inflation will not be tolerated, bolstering speculation the central bank could raise interest rates as early as next week.

Central bank chief Alexandre Tombini and Finance Minister Guido Mantega said at separate events the government will not tolerate high inflation. Mantega specifically stated that interest rates could move up.

Both officials, sometimes considered to be at odds over how to tackle inflation, shared the same tough language against a surge in prices that threatens the sluggish economy and President Dilma Rousseff's re-election prospects next year.

"There is and there will be no tolerance of inflation. We are closely monitoring all indicators at this moment and will make decisions in the future about the best course for monetary policy," Tombini told reporters in Rio de Janeiro when asked about market expectations there would be a rate increase next week.

His comments were rare because the bank's board members are usually silent before making monetary policy decisions. One is scheduled for Wednesday.

Short-dated interest rate futures, which were already rising following earlier comments by Mantega, moved even higher after Tombini's remarks, as investors bet Brazil's benchmark Selic rate was going up.

Some analysts noted that, for the first time in a long time, Tombini said he was "closely" monitoring all indicators to decide the next steps, which could be a hint an interest rate rise was imminent.

"In all his previous statements, Tombini had not used that word," said Luciano Rostagno, chief strategist at WestLB bank in Sao Paulo.

He added that, in the past, the same expression was used to signal imminent action.

"He knows markets will interpret this word as an indication that interest rates will rise immediately," Rostagno added.

The central bank is under growing pressure to raise rates from the current record lows of 7.25 percent after inflation broke through the top end of the official target in March and curbed consumer spending in February.

NO POLITICAL AGENDA

Earlier in the day, Mantega told a group of businessmen the central bank could raise interest rates if need be and that there was no political agenda to block such a move.

"We will not hesitate to take measures, even measures that are considered less popular, like for example those related to interest rates," he said.

Combined, Mantega's and Tombini's comments caused yields on interest rate futures contracts due in January 2014 to surge 19 basis points to 8.11 percent.

"The policy message in Brazil has been quite mixed over the last year. It's very curious that both Mantega and Tombini seem to be on the same page and I believe that has a purpose, which is to get the public ready for a rate hike," said Enrique Alvarez, head of research for Latin America at IDEAglobal.

While traders are betting on an imminent rate increase, most analysts until recently expected the central bank to be cautious and keep the Selic stable for now while it waits for more economic data.

A number of those analysts changed their forecasts after Tombini's comments on Friday, betting for a rate increase next week.

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