March 7, 2013 / 1:10 AM / in 5 years

UPDATE 4-Brazil holds rate steady for now, signals tightening ahead

* Brazil keeps benchmark Selic rate at 7.25 pct
    * Says to monitor macroeconomic scenario before next
    * High inflation takes priority over slow-moving recovery

    By Alonso Soto
    BRASILIA, March 6 (Reuters) - Brazil's central bank held its
benchmark interest rate steady at an all-time low of 7.25
percent on Wednesday, but signaled that policymakers are ready
to hike rates again to rein in high inflation in Latin America's
largest economy. 
    The bank's 8-member monetary policy committee, known as
Copom, voted to keep the Selic rate unchanged for
the third straight time as expected by all Sa56 economists
surveyed by Reuters last week.
    Most observers rightly predicted the bank was going to
remove the previous guidance of maintaining rate stability "for
a sufficiently prolonged period" and flag tighter policy ahead
in a bid to keep inflation in check. 
    The central bank said in a statement that the decision was
unanimous after assessing the economic and inflation outlook.  
    "The surprise is the statement, signaling an imminent hike
in interest rates," said Jankiel Santos, chief economist with
Espirito Santo Investment Bank. "Our view is that the process of
monetary cooling should start at the next meeting."  
    Bets on a higher Selic started to grow in February when
central bank chief Alexandre Tombini said he was "uncomfortable"
with current inflation levels and that the bank will not
hesitate to raise rates.  
    Inflation is moving closer to the 6.5 percent ceiling of the
official target range, raising concerns that price pressures
could not only undermine the recovery, but also hurt the
re-election chances of President Dilma Rousseff next year. 
    An increase in wholesale diesel prices announced late on
Tuesday by state-run oil company Petrobras added
pressure on the central bank to show a firmer stance to battle
inflation. The 5 percent hike in diesel prices could result in
an indirect impact of as much as 0.16 percentage point this year
on inflation, according to Banco Bradesco. 
    "The committee will accompany the evolution of the
macroeconomic scenario until its next meeting, when it will
define the next steps in its monetary policy strategy," the bank
said in the statement. 
    Most analysts agree that the central bank hinted upcoming 
inflation and economic activity data will be crucial in the next
rate decision due on April 17.  
    The last time the central bank raised rates was in July of
2011 when authorities worried the economy was overheating. 
    Since then the Brazilian economy has taken a turn for the
worse, posting meager 0.9 percent growth last year a despite
barrage of government stimulus measures to revive activity. 
    Under Tombini, the bank has been at the forefront of the
government's crusade to revive the economy, slashing 525 basis
points off the Selic in a little over a year. 
    Now the central bank faces a difficult balancing act of
keeping rates at a level that allows activity to gain momentum
while not allowing prices to rise too fast. Inflation is
expected to climb to 6.20 percent in the 12 months through
February, according to a Reuters poll on Tuesday.
    The central bank is also trying to regain its credibility as
many in the market believe it is following orders from Rousseff
to spur growth instead of maintaining its autonomy and honoring
its official mandate to keep inflation under control. 
    Tombini has said he expects inflation to ease in the second
half of the year due to a more stable local currency, subdued
food prices and government-sponsored cuts in electricity rates. 
    Rousseff is pointing to cheaper electricity as one of the
main political victories of her government as she reaches the
middle of her presidential term with a stagnant economy. 
    Some analysts say that slow-moving recovery will likely keep
the central bank from tightening policy too quickly or hiking
rates too much this year.     
    Tombini has indicated that any future rate increases will be
limited in scope thanks to the strong fundamentals of Brazil's
maturing economy, as seen in its sound fiscal accounts and
healthy financial position.
    Luciano Rostagno, chief strategist at Westlb do Brasil, Said
March inflation data will be key to the central bank decision in
April and if it starts tightening then the most likely scenario
is for a 25 basis points increase.
    "Our call is still for a hike only in July, but ... the odds
for an increase in April have increased a lot, clearly."
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