September 25, 2018 / 12:50 PM / a year ago

UPDATE 1-Brazil central bank sees muted effect of currency slump on inflation

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By Bruno Federowski and Marcela Ayres

BRASILIA, Sept 25 (Reuters) - The Brazilian real’s slide to near all-time lows has had only limited impact on prices even as core inflation accelerates to “appropriate levels,” the central bank said on Tuesday, suggesting it was in no rush to raise interest rates.

The bank last week kept the benchmark Selic interest rate at a record low of 6.50 percent at its last meeting before a pivotal presidential vote next month, but said it could gradually raise it if the inflation outlook worsens.

But the minutes of that meeting, published on Tuesday, seemed to indicate that a rate hike was not imminent in Latin America’s largest economy.

“It is possible that the relative price adjustments that occurred recently, in a context of anchored expectations, may have contributed to lifting inflation to levels compatible with official targets, without presenting risks to the maintenance of those levels once those adjustments end,” the minutes said.

This suggests that policymakers may be comfortable keeping rates low despite the Brazilian real’s slump, which was magnified by concerns that the next president may fail to curb a ballooning fiscal deficit after taking office in January.

The real has lost nearly 20 percent of its value against the U.S. dollar so far this year.

“The central bank is announcing that it will begin to remove stimulus, but that will not happen in the short term, in the next two meetings,” said Cristiano Oliveira, head of treasury at Banco Fibra. “Most likely, a hike will only happen in 2019.”

Interest rate future markets are currently pricing in a November hike. However, a central bank survey of economists predicts the first hike only in 2019, in line with recent Reuters polls.

The bank last week explicitely acknowledged the possibility of a future hike, in a striking but somewhat expected change from the noncommittal rhetoric it adopted in recent months.

Inflation has been hovering at around 4.3 percent, below the 4.50 percent midpoint of this year’s targeted range, but slightly above the 4.25 percent 2019 midpoint.

Stripped of volatile items such as energy costs and food prices, however, core inflation has remained low due to an underwhelming economic recovery and high unemployment.

The minutes said that uncertainty remained high, forcing policymakers to closely track inflation expectations and measures of currency passthrough.

The document had an excerpt saying the bank would withhold from providing hints over future rate moves to maintain “flexibility.” The document clarified that this meant the central bank should be flexible so as to “gradually adjust monetary policy if and when necessary,” highlighting growing risks stemming from the most hard-to-predict election in decades. (Reporting by Bruno Federowski and Marcela Ayres; Writing by Bruno Federowski Editing by Daniel Flynn and Bernadette Baum)

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