* Central bank says weak real may stoke short term inflation
* Policymakers vow to limit impact of weaker real on prices
By Alonso Soto
BRASILIA, July 18 Interest rate increases will
help limit the inflationary impact of a rapid weakening of
Brazil's currency, the central bank said on Thursday, signaling
policymakers are likely to keep up the pace of monetary
tightening to tame price increases.
The central bank's monetary policy committee unanimously
voted to hike its benchmark Selic rate by 50 basis points to
8.50 percent last week in what is considered one of the most
aggressive monetary tightening cycles in the world.
The bank has already raised its benchmark rate by a
cumulative 125 basis points since April to curb inflation. In
the 12 months through June, consumer prices rose 6.7 percent --
piercing the bank's 6.5 percent annual target ceiling.
In the minutes of last week's meeting, policymakers
reiterated they will remain vigilant on price trends in Brazil,
although they acknowledged the country's economic recovery is
running into speed bumps.
The central bank warned that the depreciation of the
country's currency, the real, could fan inflationary
pressures in the short-term, a process commonly known among
economists as currency pass-through. When a currency
depreciates, prices of imports rise for domestic consumers.
"The side effects arising from it (currency depreciation),
which tend to materialize over longer periods, may and should be
limited by appropriate monetary policy," the bank said in the
Following the release of the minutes, yields on
interest-rate futures contracts showed that a majority of
investors are pricing in another 50-basis-point increase in the
Selic when the bank's monetary policy committee agains meets on
In foreign exchange markets, the real firmed 0.14
percent to 2.22 per dollar. However, so far this year, it has
depreciated 7.9 percent, posting a sharper fall against the
dollar than most of the world's most-traded currencies,
according to Reuters data.
"The real may play a key role in the calibration of monetary
policy as a substantially weaker currency could force the
central bank to extend the hiking cycle in order to limit the
pass-through to domestic prices and anchor inflation
expectations," Alberto Ramos, head of Latin America economics
research with Goldman Sachs Group, said in a note to clients.
In the minutes the bank removed previous reference to an
"unfavorable" inflation outlook. However, analysts say the
recent drop in inflation explains why the bank scrapped that
Recent price indicators show inflation has started to ease.
The market expects inflation to ease to 6.43 percent in the
twelve months through mid July, back to within the official
target range, according to a Reuters survey of 16 economists.
The data will be released on Friday at 9 a.m (1200 GMT).
CURRENCY IS THE KEY
"You have a balance here. In the exchange rate front the
bank was more hawkish, but on the growth front it turned out
more dovish," said Gustavo Rangel, chief Latin America economist
with ING Bank NV in London, said after the release of Thursday'
minutes.. "There is no real sense that they are prepared to
change course ... I think another 50-basis-point (hike) is
While most central banks are cutting borrowing costs as
global inflationary pressures fall, policymakers in Brazil are
tightening policy to curtail a surge in prices stemming from
rampant government spending, and a leap in household income that
outpaced productivity gains and rising prices for some services.
Last month the central bank sharply raised its own inflation
estimates for 2013 and 2014, but signaled it would act
aggressively to meet its own goal of bringing inflation below
the 5.84 percent mark posted last year.