Thu Mar 6, 2014 8:50am EST
(Reuters) – Brazil’s central bank said on Thursday it will remain vigilant to minimize the risk of high inflation despite some moderation in price increases, signaling it may not be done raising interest rates just yet.
The bank raised its benchmark lending rate last week by 25 basis points to 10.75 percent after six straight increases of 50 basis points each, slowing the pace of monetary tightening to avoid hurting a fragile economy as inflation shows signs of easing.
In the minutes from last week’s policy meeting, the bank said monetary policy tends to have a lagging and “cumulative” impact on inflation, language that left some analysts guessing as to whether the tightening cycle that started in April 2013 is nearing its end.
“The bank has left the door open to both continue or stop the current tightening cycle,” said Jankiel Santos, chief economist with Espirito Santo Investment Bank in Sao Paulo. “The fact that the bank mentions the magnitude of the cycle suggests that it may not do much more.”
The central bank, which slashed rates to record lows in 2012, has been forced to add 350 basis points to the so-called Selic rate in the past year to battle a spike in inflation that started to curb consumption in Latin America’s largest economy.
Interest rates are now at the same level they were three years ago when President Dilma Rousseff took office, a huge disappointment for a leader who pledged lower borrowing costs would be one of the lasting legacies of her presidency.
Inflation has eased this year but remains at the upper end of the official target range of between 2.5 and 6.5 percent, in part due to high public spending. Most economists expect prices to rise more rapidly later this year due to a possible rise in energy costs after a severe drought hit hydroelectric output.
The Rousseff administration has promised to limit spending to help the central bank fight inflation and rebuild investors’ trust in the government’s fiscal discipline.
While central banks from other emerging economies have just started to hike rates to stem a renewed exodus of foreign capital, the Brazilian central bank has suggested in recent weeks that its tightening cycle may be coming to an end.
The bank’s president, Alexandre Tombini, said in late February that the monetary tightening cycle has already had some effect on inflation.
A more stable exchange rate and a slowdown in inflation has reduced pressure on the central bank to keep raising interest rates aggressively.
However, the bank warned in the minutes that it saw evidence of heightened volatility and tension in currency markets. A weaker Brazilian real increases the prices of imports.
A weak economy is also a key factor for the central bank.
Although the economy had an unexpected rebound in the last quarter of the year, activity remained subdued and gross domestic product will likely expand less than 2 percent this year, the fourth straight year of subpar growth.