May 22, 2018 / 11:46 AM / a month ago

UPDATE 1-Brazil central bank weighed rate cut before opting to hold

BRASILIA, May 22 (Reuters) - Brazil’s central bank considered cutting interest rates last week, but ultimately left them untouched due to potential inflationary pressure stemming from a weak currency, the minutes of its last policy meeting showed on Tuesday.

The bank last week unexpectedly kept the benchmark Selic rate at an all-time low of 6.50 percent, ending the deepest monetary easing cycle in a decade and contradicting widespread expectations of a 25-basis-point cut.

The bank acknowledged that the decision came as a surprise to part of the market, which gave policymakers reason to pause.

“Ultimately, an understanding prevailed that focusing on the best possible decision given the set of information available at the time results, over time, in increased credibility for monetary policy,” the minutes said.

Inflation has held below the official target range amid double-digit unemployment rates, widespread idle capacity and a slower-than-expected economic recovery, while expectations for 2018 and 2019 remain below the target’s midpoint.

Yet a spike in the U.S. dollar that drove the Brazilian real to multiyear lows has “reduced the likelihood that inflation will remain below the target in the foreseeable future through potential second-order effects on inflation,” the minutes said.

Bets that a wider U.S. fiscal deficit and accelerating inflation could drive the Federal Reserve to increase rates by more than expected have bumped up U.S. bond yields, damping demand for emerging market assets. (Reporting by Bruno Federowski and Marcela Ayres; Editing by Bernadette Baum)

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