(Adds details of minutes, inflation context)
By Alonso Soto
BRASILIA Jan 23 Brazil's central bank on
Thursday signaled it may not be ready to slow an aggressive
cycle of interest rate hikes as stubbornly high inflation
continues to worry policymakers.
In the minutes from its monetary policy meeting last week,
the central bank said Brazilian inflation has been slightly more
stubborn than expected and even revised its inflation forecast
upward for 2014. It stressed that wage dynamics will continue to
pressure consumer prices.
In the Jan. 15 meeting, the eight-member monetary policy
committee surprised most economists by raising its benchmark
Selic interest rate by 50 basis points - double the
quarter-percentage-point hike the market expected - to 10.50
percent, its highest level in about two years.
At the same time, however, the bank hinted in the statement
accompanying the decision that it may start to slow its
tightening cycle by saying that the decision to hike by 50 basis
points was appropriate "at this moment."
Although economists are divided as to whether the bank will
maintain or slow the pace of rates hikes at its next meeting,
most agreed that upcoming inflation data will be a key
determinant in the minds of policymakers.
"The bank left the door wide open for either keeping or
slowing the pace of hikes," said Flavio Serrano, senior
economist with Espirito Santo Investment Bank. "The bank is
saying that its next move will depend on upcoming inflation
Annual inflation slowed to 5.63 percent in the twelve months
to mid-January, pushing down the yields of Brazil's interest
rate futures <0#DIJ:> as traders pared back bets that the
central bank will maintain the aggressive pace of rate hikes at
its next meeting.
Looking ahead, most economists say inflation will remain
under pressure because of government spending increases combined
with a weaker local currency, which raises the value of imports.
Administered prices, or prices fixed by the government, are also
expected to rise more rapidly this year than in 2013.
At the next monetary policy meeting on Feb. 26, central bank
chief Alexandre Tombini faces a tough decision.
Opting for another rate increase may ease inflation, but at
the cost of encumbering a stumbling economy. In the third
quarter of last year, the economy contracted by 0.5 percent from
the second quarter.
As it stands, President Dilma Rousseff, expected to run for
re-election in October, potentially faces the twin liabilities
of stubbornly elevated inflation and the prospect of
near-stagnant growth for this year.
The rapid rise in consumer prices has already dented
domestic consumption, which is the country's main growth engine
and has underpinned the president's popularity.
A surprise spike in December inflation is believed to have
led the central bank to raise rates aggressively last week.
Brazil has struggled to take inflation back to the 4.5
percent midpoint of the central bank's official target range of
2.5 percent to 6.5 percent.
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 steep minimum wage
increases has kept inflation above 4.5 percent since 2008.
PRIMARY SURPLUS IN FOCUS
In the minutes, the central bank sent a strong message for
the government to keep its primary budget surplus high this year
to maintain the downward trend of the country's debt burden.
"It is important to point out that the generation of primary
surpluses at levels close to the average levels of recent years
should help reduce the cost of public debt financing," the
central bank said in the meeting minutes.
The country's finances have deteriorated in the past two
years as the Rousseff government increased public spending but
gave businesses a flurry of tax breaks, which have done little
to reignite the economy.
A pick-up in government spending has contributed to higher
inflation and stoked fears of a debt downgrade later this year.
Rousseff has repeatedly promised to keep a lid on spending
this year to convince investors that her government has not
abandoned fiscal discipline. In February, the government is
expected to announce a new fiscal savings goal for 2014.
(Additional reporting Silvio Cascione and Anthony Boadle;
editing by Todd Benson and G Crosse)