Brazil Central Bank Reiterates it is Ready to Keep Current Interest Rates

By Paulo Trevisani and Rogerio Jelmayer 

        BRASILIA--Brazil's central bank gave a cautiously optimistic assessment of its monetary policy Thursday, increasing the odds that borrowing costs will remain high for a long time.
        The bank raised its benchmark Selic interest rate to 14.25% last week and said in the minutes from that meeting, published Thursday, that monetary tightening is working, but changes in fiscal policy aren't helping.
        The 12-month inflation rate is now at 9.3%, but the bank's target is 4.5% with a two-point margin in either direction. The bank has pledged to hit the center of the target by December 2016, a commitment that was reaffirmed in the minutes.
        The outlook for lower inflation next year has improved, the bank said, but cautioned that a recent cut in the government's fiscal targets have affected inflation expectations and asset prices.
        The message in the minutes led some analysts to extend their forecast for a future interest-rate cut.
        "It makes me think the Selic will remain unchanged for longer than I had expected," said Cristiano Oliveira, chief economist at Banco Fibra.
        Mr. Oliveira now believes the central bank won't cut the rate until late in the first half of 2016, as opposed to next January, and that the rate will finish next year at a still-steep 11.25%.
        The central bank is also striving to convince analysts that inflation will hit the target. The last year that ended with price increases at that level was 2009.
        In a survey of economists by the central bank, the median forecast for 12-month inflation at the end of 2016 was 5.4%. The bank has signaled it won't start easing until that forecast is closer to 4.5%.
        The same survey forecasts a 1.8% economic contraction this year.
        Driving down inflation expectations remains difficult, and the minutes weren't enough for some analysts to cut their prediction.
        "Nothing changed that would make me reduce the forecast," said Jankiel Santos, from investment bank BES, who sees inflation at 5.4% at the end of next year. He said the minutes' evaluation of economic conditions indicates the central bank doesn't see the need for future tightening.
        Mr. Santos said that he would only reduce his inflation forecast if the economy contracted more than expected, if there were more rain to provide more hydroelectric power and drive down electricity prices, and other factors that can't be totally managed by the central bank.
        One factor favoring slower inflation is Brazil's weakening labor market, the bank said in the minutes. After years of record-low unemployment rates, a recent economic downturn has led to layoffs in many sectors, making it harder for workers to get raises.
        That has brought wage increases more in line with rises in productivity, though salaries continue to put pressure on prices, the bank said.
        The bank was careful to add a hawkish note in the minutes, according to analysts, specifically when the bank said it will remain vigilant in the event inflation rises significantly.
        That sentence indicates that "doors are not fully closed for more hikes, " Barclays economist Bruno Rovai said in a report.
        -Jeffrey T. Lewis in Sao Paulo contributed to this article.
        Write to Paulo Trevisani at paulo.trevisani@wsj.com and Rogerio Jelmayer at rogerio.jelmayer@wsj.com
        (END) Dow Jones Newswires

        August 06, 2015 11:35 ET (15:35 GMT)

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