May 7, 2015 / 12:40 PM / 5 years ago

UPDATE 2-Brazil central bank leaves door open to further rate hikes

(Adds comments, details throughout)

By Alonso Soto

BRASILIA, May 7 (Reuters) - Brazil’s central bank expects inflation to run above the official target this year and next, despite months of monetary tightening, signaling policymakers could maintain an aggressive pace of interest-rate hikes to lower stubborn prices.

In the minutes of its April 29 rate-setting meeting, the bank said it would remain vigilant to ease persistently high inflation. Last week, the bank raised the benchmark Selic rate by 50 basis points for the fourth straight time to 13.25 percent.

The bank is under pressure to tighten policy to ease high inflation and recoup its credibility, but on the other hand, more rate hikes could end up further slowing activity in a recession-bound economy.

In the minutes, the bank made clear that inflation would only hit the target by the end of next year, and again acknowledged in the minutes its efforts to slow price increases remained “insufficient.” Before the meeting the bank said it aimed to ease inflation toward the 4.5 percent center of the target throughout 2016.

The bank said monetary policy should aim to contain the effects of higher government-controlled prices and a weaker real on inflation this year. Central bank director Luiz Awazu Pereira recently said secondary effects should be limited to 2015, but it is the first time policymakers have acknowledged that in the minutes.

“The bank sounds more hawkish. It is tougher on inflation than in its last minutes,” said Alessandra Ribeiro, an economist with Tendencias in Sao Paulo. “We cannot rule out another 50-basis-point rate hike in June and maybe even a last increase in July.”

Yields in Brazilian interest rates futures contracts <0#2DIJ:> rose on Thursday, signaling that traders expect policymakers to keep raising the Selic.

The bank “is now clearly more focused and forthcoming in the quest of driving inflation to the target, and less concerned with or distracted by the real sector and labor market dynamics,” Alberto Ramos, senior economist with Goldman Sachs in New York said in a note.

Before the release of the minutes, economists agreed the bank will likely hike rates by 25 basis points in June before ending the hiking cycle, according to a central bank survey of economists. (Additional reporting by Silvio Cascione; Editing by Jeffrey Benkoe and Bernadette Baum)

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