UPDATE 2-Brazil central bank pledges to limit food inflation jump

Tue Mar 18, 2014 12:26pm EDT

By Luciana Otoni

BRASILIA, March 18 (Reuters) - Brazil's central bank should act to limit the effects of a recent increase in food prices, central bank chief Alexandre Tombini said on Tuesday, signaling that policymakers may keep raising interest rates to battle inflation.

In a presentation to a Senate committee, Tombini said the rise in food prices was temporary and should fade over the next few months.

"At first, this seems to be a temporary shock that tends to be reversed over the next few months. Still, monetary policy should act to make sure these shocks are limited to the short term," he said.

A severe drought hitting some of the country's main agriculture regions had started to increase the value of some foods, mostly vegetables.

Tombini repeated that the full impact of previous rate hikes over inflation remained to be seen and that the bank would stay "especially vigilant" to contain price increases.

The central bank was expected to wrap up its aggressive monetary tightening cycle soon, after adding 350 basis points to the benchmark Selic rate since April 2013.

Although inflation remains high, some policymakers fear more interest rate hikes could hamper an economy that had been stuck in a rut since 2011.

The bank raised the Selic by 25 basis points to 10.75 percent on Feb. 26, slowing the pace of monetary tightening after six straight increases of 50 basis points each.

Interest rates are now at the same level they were three years ago when President Dilma Rousseff took office, a huge disappointment for a leader who pledged lower borrowing costs would be one of the lasting legacies of her presidency.

After easing somewhat at the start of the year due a slowdown in food prices, inflation again rose to 5.68 percent in February, edging closer to the ceiling of the official target of 6.5 percent.

Inflation will likely end the year at 6.11 percent in 2014, according to a weekly central bank poll of analysts.

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