June 20, 2018 / 9:37 PM / a year ago

UPDATE 2-Brazil holds rates despite weak currency; strike raises uncertainty

(Adds quotes from rate-setting committee, economist)

By Bruno Federowski and Patricia Duarte

BRASILIA/SAO PAULO, June 20 (Reuters) - Brazil’s central bank kept interest rates unchanged on Wednesday, as expected, refraining from hiking even after a sharp currency slide as policymakers highlighted the unclear impact of a nationwide protest by truckers in late May.

The statement from the bank’s nine-member monetary policy committee, which kept the benchmark Selic rate at 6.50 percent, raises the stakes for upcoming economic indicators, which may be key to determining the committee’s next moves.

All but one of 38 economists polled by Reuters had forecast the bank would stand pat.

“The temporary halt in the transportation sector in May makes it more difficult to assess the recent evolution of economic activity,” the bank said in its policy statement.

“April data suggest more consistent activity relative to previous months. Indicators for May – and possibly June –, however, are likely to reflect the effects of the aforementioned halt.”

The Brazilian real slumped in recent weeks as concerns over an unpredictable October election and the erratic policy response to striking truckers accentuated a selloff in global emerging markets.

Despite higher import prices due to the weaker currency, policymakers have repeatedly stressed that foreign exchange moves would drive monetary policy only if they affected inflation more broadly or expectations for price hikes.

Still, the bank said in its policy statement that the risk of the global economy boosting inflation in Brazil had increased since the bank’s May meeting, while the risk of inflation remaining below the bank’s target had fallen. The bank said that the current scenario warrants keeping rates on hold.

A Reuters poll this week indicated that inflation is likely to soar in early June due to product shortages related to the strike, which paralyzed key economic sectors and forced farmers to cull their flocks and dump spoiled milk.

Yet high unemployment and widespread idle capacity are keeping a lid on underlying inflation trends, driving most economists polled by Reuters to keep their forecasts that the central bank will only hike rates in 2019.

“The main message from today’s Copom meeting in Brazil is that policymakers are content to look through a temporary spike in inflation,” Capital Economics chief emerging markets economist Neil Shearing wrote to clients.

“Our base case remains that Copom is unlikely to tighten this side of October’s elections.” (Reporting by Bruno Federowski in Brasília and Patricia Duarte in São Paulo; Writing by Bruno Federowski Editing by Leslie Adler and Diane Craft)

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