Brazil monetary policy driven by inflation, not currency -source

Wed Jan 29, 2014 12:02pm EST

* Emerging market rate hikes expected -official

* Brazil looks set to handle emerging market volatility

* Real, other emerging currencies remain under pressure

By Patricia Duarte

BRASILIA, Jan 29 (Reuters) - Brazil's monetary policy is aimed at curbing inflation and not easing currency volatility, a member of the government's economic team told Reuters on Wednesday after a sharp sell-off of emerging market currencies raised fears of a potential crisis.

Investors have been rattled by worries about the health of Brazil and other emerging economies that had been growing rapidly until recently. Central banks from India to South Africa and Turkey to raise rates to contain the spillover.

"Brazil is at a much better position than others because we started to adjust our rates early and have high foreign reserves levels," said the official, who asked for anonymity to speak freely.

The central bank, which has raised its benchmark Selic rate by 325 basis points since April, will continue to battle high inflation without shifting its focus to the fluctuations of the local currency, the official said.

He said rate increases in emerging nations were expected as the United States reduces the monetary stimulus that flooded those economies with foreign capital.

Brazil's real and other emerging market currencies were back under pressure on Wednesday as expectations the U.S. Federal Reserve will press on with stimulus cuts later in the day reheated doubts over developing markets' appeal for investors.

The real weakened nearly 0.4 percent to 2.43 per dollar on Wednesday afternoon.

The official said the market may be pushing the real too low and that could bring in sellers and halt the depreciation. The source did not say if the central bank could increase forex interventions to ease the real's depreciation.

"My vision is not pessimistic. In the short to medium term the outlook will remain challenging. But if the recovery in the United States and Europe materializes then I believe the situation will normalize," the official said.

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