(Adds analysts' comments, market reaction and context)
By Alonso Soto and Silvio Cascione
BRASILIA, July 24 Brazil's central bank signaled
on Thursday it is unlikely to cut interest rates any time soon
and instead is focused on curbing naggingly high inflation even
as the economy flirts with recession.
In the minutes of its last policy meeting, the bank stressed
that interest rates at current levels should help ease inflation
in coming years. The comments quashed market speculation that a
rate cut could be on the horizon, sending interest-rate futures
The bank kept its benchmark Selic rate on hold
at 11 percent for the second straight time last week, but
surprised markets by not clearly spelling out its next policy
moves, as it normally does.
That uncertainty and the risk that the Brazilian economy
could already be in recession prompted some investors to bet the
central bank would loosen policy.
In the minutes, the bank ruled out slashing borrowing costs
"The committee anticipates an outlook of resistant inflation
in coming quarters, but keeping monetary conditions stable -
that is, taking into account a strategy that does not include a
reduction of the monetary policy instrument - tends to get
(inflation) in the path of convergence toward the goal," the
bank said in the minutes.
Yields paid on Brazil's interest-rate futures contracts
<0#2DIJ:> jumped higher on Thursday after the release of the
"The bank was very explicit to clear up any doubts from
those who still thought policymakers planned to cut rates," said
Juan Jensen, chief economist at Tendencias consultancy in Sao
"We are probably already in a recession, but the
inflationary outlook is so complicated that the bank cannot
loosen monetary policy at this time," he added.
Many economists believe the economy contracted in the second
quarter and that authorities will revise first-quarter figures
to show contraction for that period too, which would mean Brazil
has slipped into a recession. The national statistics agency is
scheduled to release second-quarter gross domestic product data
on Aug. 29.
The mix of high inflation and a slowing economy could
threaten President Dilma Rousseff's re-election chances.
Senior officials told Reuters recently that curbing
inflation is a top priority for the government, meaning that it
is too early for the central bank to resume cutting interest
Enestor dos Santos, economist at BBVA in Madrid, said the
central bank is working to regain its inflation-fighting
credibility and drag down inflation expectations.
He added that the bank's reference in the minutes to past
macroprudential measures that eased rapid credit growth could
signal policymakers could use those tools again to help some
sectors of the economy.
"It is a reminder that macroprudentials are still there,"
dos Santos said.
Macroprudential policies are meant to care for the health of
the financial system by increasing or reducing reserve and
capital requirements as well as taxing financial operations.
Initially used to ease the flow of U.S. dollars into the
economy and limit a rapid credit expansion, Brazil started to
remove macroprudential measures as the economy weakened in 2012.
(Writing by Alonso Soto; Editing by W Simon and Peter Galloway)