UPDATE 1-Brazil central bank flags benchmark rate as anti-inflation tool

Thu Feb 13, 2014 10:00am EST

By Luciana Otoni

CURITIBA, Brazil Feb 13 (Reuters) - Brazilian central bank director Carlos Hamilton Araujo on Thursday underscored that interest rates were the bank's tool to curtail high inflation, apparently signaling more monetary policy tightening ahead.

Araujo, the bank's director of economic policy, said at an event in the southern city of Curitiba that consumer inflation has remained high, resisting a drop.

The central bank has raised its Selic rate 325 basis points to 10.50 percent since April in a bid to tame a surge in prices that threatens to cool an already fragile economic growth. The bank is expected to raise rates once again on Feb. 26.

Recent market volatility buffeting emerging nations has weakened the Brazilian real currency, raising pressure on inflation that remains at the upper end of the official range of between 2.5 percent and 6.5 percent. A weaker real raises the value of imports.

"The Selic rate is the instrument that the bank has at hand to deal with inflation," Araujo told reporters, adding that the country is well prepared to withstand global markets volatility.

He said that a slowdown in inflation in January curbed inflation expectations, but that they remain high and a "challenge for monetary policy."

Another factor that could influence monetary policy is whether the government of President Dilma Rousseff can reduce public spending after a severe deterioration of the fiscal accounts, analysts say.

Her government is expected to announce next week its main fiscal goal for 2014, which investors believe is key to determine how committed her government is to prudent fiscal policies. A drought that has raised energy costs could make the government opt for a smaller fiscal goal.

Araujo reiterated that tighter fiscal policies help monetary policy.

The Brazilian economy will likely grow at a pace similar to last year, but an improvement in business and consumer confidence could accelerate activity, Araujo said. Private economists believe the South American country's economy grew just above 2 percent in 2013.

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