* Bank says monetary tools cannot fix economy's shortcomings
* Warns that inflation to remain resilient in short term
* Hawkish stance surprises some analysts, see rates on hold
By Alonso Soto
BRASILIA, Jan 24 Brazil's central bank signaled
on Thursday that further interest rate cuts are unlikely because
they won't solve the causes of the country's economic slump,
sending a strong message to investors that inflation remains its
The bank acknowledged for the first time that interest rate
cuts might prove ineffective to fight the bottlenecks and the
production gaps that are weighing on the world's No. 6 economy.
In the minutes from its last rate-setting meeting on Jan.
16, the bank said that the economic recovery has been painfully
slow "essentially due to limitations on the supply side."
It added that monetary policy is unable to address those
issues because it is a tool meant to control demand.
That more hawkish language was taken as a signal that the
central bank will keep rates at the current 7.25 percent for a
long time or even hike them later this year or early in 2014.
Without further help from the central bank to foster growth,
President Dilma Rousseff may find it more difficult to regain
the above 4 percent growth rates that made Brazil an emerging
market darling among investors. Another disappointing economic
year could jeopardize the chances of her Workers Party to be
re-elected in 2014.
Since August 2011, many economists believed the central bank
was focused more on stimulating economic growth than controlling
inflation, as it cut 525 basis points off its Selic rate.
Now that inflation is picking up fast, the bank is trying to
regain its inflation-fighting credentials, analysts said.
"If cutting interest rates is not enough to revamp the
investment cycle then there is a political issue that has to be
solved and the central bank cannot do anything about that," said
Cristian Maggio, emerging market strategist for TD Securities.
"The overall message that the bank is sending out is that
rates will remain stable despite the slower than expected growth
which is entirely counterbalanced by the fact that inflation has
deteriorated more than they were initially expecting."
Brazil's interest future contracts rose across the
board after the release of the minutes on Thursday as traders
saw few chances of a rate cut any time soon.
Central bank chief Alexandre Tombini late on Wednesday
hinted to investors at the World Economic Forum in Davos that
the bank will not hesitate to hike rates to control inflation.
"The central bank remains vigilant and will do what it has
to do to handle monetary policy in Brazil. We will control
inflation, as has been the case over the past nine years,"
Tombini said, according to excerpts of a recording of his speech
provided by the central bank's press office.
PRICE SPIKES, SUPPLY WOES
The bank warned that inflation will remain "stubborn" in the
short term due to a reversal in tax breaks and seasonal
pressures on transportation, the minutes added.
The bank said that future rate decision will aim to assure
the convergence of inflation toward the official target in a
Inflation rose faster in the month to mid-January than most
analysts expected, reaching an annual print of 6.02 percent,
according to data released on Wednesday. That is well above that
of regional peers like Mexico and Chile, whose economies are
growing at a much faster pace.
The bank's inflation estimate for 2013 rose since its last
meeting in November and remains above the center of the target
range of 4.5 percent, the minutes said, without specifying its
forecast inflation for this year.
That higher inflation projection takes into consideration a
projected 5 percent increase in gasoline prices this year and a
reduction of about 11 percent in electricity rates for household
That projection is now outdated after the government on
Wednesday confirmed that residential consumers will pay 18
percent less for power.
A government source told Reuters on Monday that the bank
estimates that the cut in electricity prices should shave a full
percentage point off consumer inflation by the end of 2013.
Rousseff's announcement on Wednesday of the
deeper-than-expected energy cuts could ease inflation
The cut in energy fares also aims to support an economy
that has struggled to grow since Rousseff took office in 2011.
The Brazilian economy is suffering from deeper problems
linked to supply bottlenecks such as inadequate infrastructure,
high taxes and burdensome red tape.
A World Economic Forum report on trade said that managing
customs paperwork for exports of agricultural commodities can
take more than 12 times longer in Brazil than in the European
Union. It also flagged barriers for industries as diverse as
high tech, handset and chemical due to Brazil's unsafe business
environment, complex tax system and steep custom requirements.
An improvement in infrastructure and removal of other trade
barriers could increase Brazil's economy by 3.6 percent and
raise its exporters 30 percent, the report said.