* Tombini suggests central bank may raise rates
* Brazil yields rebound after falling on weak retail sales
* Brazil real firms 0.39 pct, Mexico peso adds 0.35 pct
By Paula Laier
SAO PAULO, Feb 19 Yields on Brazil's interest
rate futures rose on Tuesday after the country's central bank
chief said policymakers could raise interest rates if inflation
worsens, backing bets on a rate hike later this year.
Inflation in Brazil, Latin America's top economy,
accelerated in January to its fastest pace in eight years and
the market is betting that policymakers will raise their
benchmark interest rate off a record low later this year
Central Bank President Alexandre Tombini on Tuesday said the
bank is ready to "adjust" monetary policy if needed, but he
said inflation is not spiraling out of control, reinforcing the
view that the bank is not about to take any action just yet.
The comments drove yields on interest rate futures
higher as investors firmed bets on a hike of 50 basis points by
May and about 100 basis points during the year.
"We're talking about something uncertain, a hike will only
come if inflation does not ease," said Thiago Castellan, a
trader at Renascenca DTVM.
The yield on the interest-rate contracts maturing in January
2014, the most traded in the session, rose five basis
points to bid at 7.77 percent, its highest since September.
The market is eyeing less than a 50 percent chance for a
25-basis-point hike in March, but slightly more than even odds
of a quarter-percentage-point hike in April.
The central bank cut its benchmark Selic rate
10 straight times through October 2012 to a record low of 7.25
percent. It has pledged to hold it there for a "prolonged"
period to help revive sluggish economic growth.
Early in the session yields fell after a surprise drop in
retail sales in December suggested slowing growth could keep
policymakers from raising interest rates, but yields rebounded
on Tombini's comments.
In a speech in Brasilia, Tombini said that the central
bank's current strategy to hold rates remains valid.
"That doesn't mean, of course, that monetary cycles have
been abolished ... When necessary, if prompted by the
prospective inflation outlook, the central bank's monetary
policy stance will be properly adjusted."
Brazil's currency, the real, strengthened 0.39
percent to 1.9545 per U.S. dollar.
Elsewhere in Latin America, Mexico's peso firmed 0.35
percent, helped by flows into the local debt market.
The yield on Mexico's benchmark 10-year peso bond
bid down 1 basis point to 5.04 percent.
The market is betting that Mexico could lower interest rates
later this year if inflation continues to cool in Latin
America's second-biggest economy. A cut could drive down bond
yields further and push up the price of bonds.
Latin American FX prices at 2100 GMT:
Currencies Daily YTD pct
Brazil real 1.9545 0.39 4.37
Mexico peso 12.6380 0.39 1.79
Chile peso 471.9000 -0.04 1.44
Colombia peso 1790.7500 -0.20 -1.38
Peru sol 2.5810 -0.12 -1.16
Argentina peso 5.0200 -0.15 -2.14
Argentina peso 7.7900 -1.16 -12.97