Reuters: US Dollar Report: UPDATE 1-Brazil central bank signals no more rate cuts ahead

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UPDATE 1-Brazil central bank signals no more rate cuts ahead Jan 24th 2013, 11:54 Thu Jan 24, 2013 6:54am EST * Bank says monetary tools cannot fix supply shortcomings * Warns that inflation to remain resilient in short term BRASILIA Jan 24 (Reuters) - Brazil's central bank signaled on Thursday that further interest rate cuts are unlikely because they won't solve the causes of the country's economic slump, sending a strong message to investors that inflation remains its top priority. The central bank held rates steady for the second straight time at 7.25 percent at its Jan. 16 monetary policy meeting. In minutes from that meeting, the bank said in bold language that monetary policy might prove ineffective to fight the bottlenecks and the supply gap that are weighing on the economy. "The Monetary Policy Committee argues that the pace of recovery in domestic economic activity -- less intense than anticipated -- is essentially due to limitations on the supply side," the bank said. "Given its nature, therefore, these impediments can not be addressed by monetary policy actions, which are par excellence, instrument to control demand." Inflation will remain "stubborn" in the short term due to a reversal in tax breaks and seasonal pressures on transportation, the minutes added. "This statement really rules out the possibility of any rate cut, but it would be unrealistic to reduce borrowing costs in this environment of quickening inflation," said Luciano Rostagno, chief strategist with Banco WestLB do Brasil in Sao Paulo. The bank's inflation estimate for 2013 rose since its last meeting in November and remains above the center of the target range of 4.5 percent, the minutes said, without specifying its forecast inflation for this year. That higher inflation projection takes into consideration a projected 5 percent increase in gasoline prices this year and a reduction of about 11 percent in electricity rates for household consumers. President Dilma Rousseff's administration is scrambling to keep a lid on inflation, which rose faster in the month to mid-January than most analysts expected. Annual inflation for that period rose to 6.02 percent, well above that of regional peers like Mexico and Chile, whose economies are growing at a much faster pace. Rousseff on Wednesday announced deeper-than-expected energy cuts to lower the costs for household consumers and businesses who pay some of the world's highest electricity bills. Those cuts should take some pressure off inflation as the year progresses, economists say. Link this Share this Digg this Email Reprints

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