Reuters: US Dollar Report: UPDATE 2-Brazil central bank leaves door open for next rate move -minutes

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UPDATE 2-Brazil central bank leaves door open for next rate move -minutes Sep 6th 2012, 15:25 Thu Sep 6, 2012 11:25am EDT * Bank not ready to commit to end of easing cycle * Any extra rate cut should be done with "maximum" caution * Spike in food prices poses short-term inflation risk * Upcoming data could determine bank's next step-analysts By Alonso Soto and Silvio Cascione BRASILIA, Sept 6 (Reuters) - Brazil's central bank signaled it was wrapping up a year-long policy easing cycle, but left the door open for a final rate cut as it sees inflation remaining under control, according to minutes released Thursday from its last monetary policy meeting. Central bank policymakers said they were confident the sluggish economy would pick up speed in the coming months and that the pace of annual inflation would return to a downward trajectory after a temporary spike in food prices. The bank cut its benchmark Selic rate for the ninth straight time to an all-time low of 7.5 percent on Aug. 29 to bolster an economy that has reacted very slowly to a flurry of tax and rate cuts. The minutes showed that the central bank was not yet ready to end the rate-cutting cycle, even after acknowledging it had some worries about quickening inflation. The bank reiterated that any additional interest-rate cut should be done with "maximum" caution, which analysts interpret to mean a smaller rate cut in future of 25 basis points. "The current easing cycle may have ended in August, or is just one small iteration, step away from ending; upcoming data will tell," said Alberto Ramos, chief Latin America economist with Goldman Sachs in New York. Inflation has surprised on the upside, as higher food prices in August stoked inflation to its fastest pace for that month in five years. Since July, 12-month inflation has also reverted its downward trend, moving away from the center of the official target of 4.5 percent. At 5.24 percent, annual inflation remains below the target ceiling, but may pressure the central bank to soon end its aggressive rate-cutting campaign, which has trimmed 500 basis points off its benchmark Selic rate since August 2011. The bank's Monetary Policy Committee, known as Copom, hinted it was worried about short-term inflation, but expects a recent jump in commodities prices to be temporary, the minutes said. "The outlook for inflation since the last Copom meeting, although for the short term has been negatively impacted by supply shocks related to weather events, domestic and foreign, remained favorable over longer period," the bank said in the minutes. Although it expects 12-month inflation rate to continue converging toward the official target (of 4.5 percent plus or minus 2 percentage points), the bank recognized in its reference scenarios that inflation should remain above the center of the target in 2012, 2013 and the first half of 2014. Yields on Brazil's interest rate futures were nearly unchanged for the nearest dated contracts on Thursday, as traders were split on whether the minutes presaged the end of the current interest-rate cycle. RECOVERY AHEAD After a year of aggressive rate cuts and more than a dozen government stimulus packages, the Brazilian economy is finally showing some signs of life. Still, even with that massive stimulus, the economy is seen growing less than 2 percent this year, much slower than 7.5 percent expansion in 2010. The bank said in the minutes that the delayed effects of monetary and fiscal stimulus should support activity ahead. "The Copom argues that, although the expansion of domestic demand has moderated, the outlook for economic activity in the following semesters are favorable," the bank said. It stressed that government efforts to open up key infrastructure projects to the private sector are poised to increase investment during this and coming semesters. It added that the probability of "extreme events" in global financial markets had decreased since its previous rate-setting meeting in July. A fall in investment slowed the pace of the economic recovery during the second quarter. Low spending on capital goods and a slowdown in credit disbursement also pose a challenge for the recovery ahead, analysts say. Aiming to spur longer-term growth, President Dilma Rousseff is aiming to lower the country's infamously high output costs known locally as the "Brazil Cost." In August, she unveiled measures to lure $66 billion in private capital to refurbish the country's decaying roads and railways. She also plans to announce hefty cuts to electricity rates and more concessions of airports and seaports. Link this Share this Digg this Email Reprints

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