January 29, 2015 / 11:46 AM / 5 years ago

UPDATE 2-Brazil's central bank opens door to smaller rate hike in March

(Recasts, adds market comments)

By Silvio Cascione and Anthony Boadle

BRASILIA, Jan 29 (Reuters) - Brazil’s central bank cemented expectations of another interest rate hike in March but suggested it could slow the pace of increases going forward, according to the minutes of its last monetary policy meeting released on Thursday.

The bank said it has not yet made sufficient progress in curbing price increases but noted inflation now looks more likely to ease towards the 4.5 percent target in 2016 after three consecutive interest rate hikes.

The central bank last week raised its benchmark Selic rate by 50 basis points to 12.25 percent, bucking a global trend of lower interest rates as it tries to win back investor confidence after years of stubbornly high inflation.

Most investors had already been expecting at least another rate increase in the bank’s next meeting on March 4, but there are doubts about the size of the move. Yields on short-dated dropped as traders saw greater chances of a smaller, 25-point increase.

“Are we going to see another rate hike? Yes. But the magnitude of that next increase, that will depend on each economist’s outlook,” said Cristiano Oliveira, treasurer of Banco Fibra in Sao Paulo.

A terse post-meeting statement last week left economists wondering whether the central bank was being deliberately ambiguous about its next moves, as there are signs that recent efforts to tame inflation could hurt the job market and help nudge Brazil’s economy into a recession this year.

The bank made no mention of doing “whatever is necessary” to bring inflation down, as it had in its latest inflation report, but it reiterated that monetary policy should remain “especially vigilant.”

Inflation shot up to 6.69 percent in the 12 months ending in mid-January, well above the 4.5 percent official target.

The bank repeated that inflation might climb further in the near term as the government allows administered prices such as gasoline and electricity to rise after keeping them artificially low to control inflation.

The central bank expects government-controlled prices to rise 9.3 percent in 2015, up from a previous estimate of 6.0 percent. Nonetheless, despite expectations of high fuel prices, the bank said the recent plunge in oil prices tends to impact inflation expectations because of its effects in the petrochemical industry.

The bank did not alter its assessment that more restrictive fiscal policy will help improve the inflation outlook. New Finance Minister Joaquim Levy has announced a series of tax hikes and budget freezes to halt a steep increase in public debt. (Additional reporting by Bruno Federowski in Sao Paulo; Editing by Toby Chopra, Lisa Von Ahn and Chizu Nomiyama)

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