Reuters: US Dollar Report: UPDATE 1-Brazil hints at rate hikes to curb currency pass-through

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UPDATE 1-Brazil hints at rate hikes to curb currency pass-through Jul 18th 2013, 12:58 Thu Jul 18, 2013 8:58am EDT * Central bank says weak real may stoke short term inflation * Policymakers vow to limit impact of weaker real on prices * Minutes point to relevant risks to timid economic recovery By Alonso Soto BRASILIA, July 18 (Reuters) - Interest rate increases will help limit the inflationary impact of a rapid depreciation of Brazil's currency, the central bank said on Thursday, signaling policymakers are likely to keep the pace of monetary tightening to tame price increases. The central bank's monetary policy committee unanimously voted to hike its benchmark Selic rate by 50 basis points to 8.50 percent last week in what is considered one of the most aggressive monetary tightening cycles in the world. In the minutes of last week's meeting, policymakers reiterated they will remain vigilant on price trends in Brazil, although they acknowledged the country's economic recovery is running into speed bumps. The central bank warned that the depreciation of the real could fan inflationary pressures in the short-term, but that monetary policy should limit the impact of a weaker currency on prices - a process commonly known among economiststs the currency pass-through. The real lost 9.3 percent of its value against the U.S. dollar this year. "You have a balance here. In the exchange rate front the bank was more hawkish, but on the growth front it turned out more dovish," said Gustavo Rangel, chief Latin America economist with ING Bank NV in London. "There is no real sense that they are prepared to change course ... I think another 50-basis-point (hike) is certain." The real, which is the world's second-worst performing currency this year, shed 0.6 percent on Thursday to 2.24 to the dollar. In the minutes the bank removed previous reference to an "unfavorable" inflation outlook. However, analysts say the recent drop in inflation explains why the bank scrapped that warning. Recent price indicators show inflation has started to ease in Brazil, although some analysts doubt inflation will reach the center of the official target -- 4.5 percent plus or minus two percentage points-- this or next year. Link this Share this Digg this Email Reprints

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