September 4, 2014 / 12:10 AM / 3 years ago

Brazil keeps interest rates steady ahead of election

BRASILIA (Reuters) - Brazil held interest rates steady for a third straight time on Wednesday, signaling it is in no rush to help an economy that fell into recession just weeks before a heated presidential election.

The central bank’s monetary policy committee, known as Copom, unanimously decided to keep its benchmark Selic rate BRCBMP=ECI at 11 percent, as had been widely expected by both the market and analysts.

In a statement, the central bank said it evaluated the economic and inflation outlook to make its decision, but removed the phrase “at this moment,” which analysts interpreted as a sign that policymakers will leave rates steady for some time.

“The removal of that phrase reinforces the signal the bank gave in the previous minutes that it will not cut rates in the short term despite weak economic activity,” said Alberto Ramos, an economist with Goldman Sachs in New York.

The bank has said its past rate hikes will take some time to take full effect on inflation, which remains at the 6.5 percent ceiling of the official target.

Pressure on the bank to support an economy that has struggled to grow since 2011 increased after data showed last week that Brazil slipped into recession early in 2014 for the first time in five years.

The bank has eased reserve requirements to bolster credit, but kept interest rates at more than two-year highs to counter high inflation and avoid any criticism of undue intervention before a presidential vote in October.

Still, inflation is expected to remain high due to robust consumption and likely increases in government-controlled prices for fuel and electricity.

“We have high inflation and weak activity. Under those circumstances it is very likely that the bank will keep rates on hold for at least until the end of the year,” said Juan Jensen, chief economist with Sao Paulo-based consultancy Tendencias. “What happens next year will depend on who wins the election.”

Over the last three years the central bank slashed rates to record lows of 7.25 percent under its chief Alexandre Tombini only to make a U-turn and raise them aggressively as inflation kept climbing.

President Dilma Rousseff has partly blamed higher rates for the country’s recession in the first half of the year. Finance Minister Guido Mantega has said he will work to create conditions for the bank to cut rates in 2015.

After initially expecting a sharp monetary tightening next year, some investors are betting rates won’t have to go up as much if environmentalist Marina Silva beats Rousseff in the election. They believe Silva would provide a confidence shock by adopting more market-friendly policies to ease inflationary pressures that have surged under leftist Rousseff.

Brazil’s interest-rate futures have fallen over the last two weeks after Silva was thrust into the race following the death of her party’s candidate, Eduardo Campos, in a plane crash.

Silva has not said whether rates should be brought down next year. She has promised to give full independence to the central bank, a longstanding demand of investors and financial markets. If elected, she is expected to change the bank’s leadership.

Reporting by Alonso Soto, editing by Walter Brandimarte, G Crosse, Dan Grebler and Bernard Orr

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