July 18, 2014 / 7:32 PM / in 4 years

Too early for Brazil's central bank to cut rates - source

BRASILIA, July 18 (Reuters) - The market is getting ahead of itself if it thinks Brazil’s central bank could start cutting interest rates again to rescue a weakening economy, a member of the government’s economic team told Reuters.

With Brazil at risk of falling into a technical recession, some investors are betting the central bank will loosen monetary policy just a few months after deciding to pause a rate-hiking cycle that has weighed on the economy.

“It is too early to talk about a rate cut. The central bank has just ended a monetary tightening cycle,” said the official, who is not involved in monetary policy decisions and spoke on condition of anonymity.

Although prices will likely ease on a monthly basis, 12-month inflation should remain around the 6.5 percent ceiling of the official target until August, the official said.

The central bank on Wednesday kept interest rates steady at 11 percent for a second straight meeting, but gave no clues on what it would do next even as inflation remains high. The bank was criticized by many economists in May for pausing a tightening cycle that added 375 basis points to its Selic overnight rate in just a year.

Brazil’s biggest hedge fund, Credit Suisse Group AG’s CSHG Verde FIC FIM, is betting the central bank will cut rates to revive the economy, which is suffering from dwindling business and consumer confidence and a sluggish global economy.

Former central bankers and some investment banks also see the chance of a monetary U-turn as soon as September.

The mix of high inflation and a slowing economy could threaten the re-election chances of President Dilma Rousseff. The leftist Rousseff is statistically tied with her main rival in a possible second-round runoff in October, a poll showed late on Thursday.

The economic slowdown has curbed tax income more than the government expected, but the government will do its part to control inflation by keeping spending in check for the rest of the year, the official said.

“I‘m worried about tax revenues, which have been negatively impacted by (economic) activity,” the official said. “But there are always ways to look for fresh revenues.”

The official said the government will meet its primary budget surplus goal of 1.9 percent of gross domestic product this year. A sharp drop in revenues has raised the risk of the government missing the target for a third straight year, analysts said.

“Either our revenues recover or our expenditures will need to be adjusted,” the official said. “It is necessary that we meet our goal.” (Writing by Alonso Soto; Editing by Paul Simao)

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