UPDATE 1-Brazil fighting inflation impact of weaker currency -cenbank head

Mon Jan 27, 2014 7:14am EST

By Carolyn Cohn

LONDON Jan 27 (Reuters) - The Brazilian central bank will fight the effects that the country's weakening currency has on inflation, central bank chief Alexandre Tombini said on Monday, hinting policymakers are not ready yet to halt the monetary tightening cycle.

Tombini said in a speech in London that the bank has raised interest rates to fight inflation and weather changing global financial conditions. He said the bank's action to slow inflation should help ease inflation expectations.

The central bank raised its benchmark Selic interest rate by half a percentage point to 10.50 percent earlier this month, but signaled it may be ready to slow the pace of one of the world's most aggressive tightening cycles.

Brazil has raised the Selic benchmark rate by 3.25 percentage points since last April.

Tombini acknowledged that inflation in Brazil remains high but stressed that food inflation is slowing. He said annual inflation will hover around 5.7 percent in January.

Despite overcoming hyperinflation in the mid-1990s, Brazil's economy continues to suffer from high inflation when compared to its regional peers.

A combination of high public spending levels, high indexation of prices in local contracts and a sharp depreciation of the country's real currency has contributed to keeping inflation above 4.5 percent since August 2010. The real weakened around 13 percent last year against the dollar.

Private economists in a central bank survey, released on Monday, forecast 2014 inflation at 6.02 percent, well above the official target midpoint of 4.5 percent.

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