UPDATE 3-Brazil slows interest rate hikes to shield weak economy

miércoles 26 de febrero de 2014 21:36 GYT

(Adds analyst comment and context)
    By Alonso Soto
    BRASILIA, Feb 26 (Reuters) - Brazil slowed the pace of
monetary tightening on Wednesday, signaling it may be near the
end of a rate-hiking cycle that threatened to tip Latin
America's largest economy into a recession.  
    The central bank's monetary policy committee voted
unanimously to hike its Selic rate by 25 basis points, breaking
a streak of six straight 50-basis-point hikes that took the
benchmark rate to its highest level in over two years.  
    The bank kept its post-decision statement almost unchanged
from the previous one, only removing a phrase added at its last
meeting that said the decision had been taken "at this moment." 
    While the bank did not close the door to raising rates again
at its next meeting in April, many economists saw the decision
as a signal that it may soon end one of the world's most
aggressive monetary tightening cycles. 
    "The central bank is signaling that it is ready to end the
cycle," said Andre Perfeito, chief economist at Gradual
Investimentos in Sao Paulo. "The bank is being more cautious due
to a sense that economic activity can slow down a lot in 2014."
    Smaller rate hikes from now on would come as a relief for
President Dilma Rousseff, who has watched Brazil's economy slow
to a crawl since taking office in January 2011. Rousseff plans
to seek a second term in October and is eager to see an economic
revival before the elections.
    Brazil nearly slipped into a recession in the second half of
2013, according to economists polled by Reuters last week.
Official data set for release on Thursday is expected to show
the economy expanded by a meager 0.3 percent in the fourth
quarter from the previous quarter, according to the poll. 
    The central bank, which slashed rates to record lows in
2012, has been forced to add 350 basis points to the Selic since
April to battle a spike in inflation, which started to curb
consumption in Latin America's largest economy.
    Interest rates are now back to where they were three years
ago when Rousseff took office, promising to lower the cost of
    While central banks from other emerging nations have just
started to hike rates to stem a renewed exodus of foreign
capital, the Brazilian central bank has signaled its tightening
cycle may be coming to an end. 
     The bank's president, Alexandre Tombini, said last week
that past rate hikes have helped slow inflation, a hint that the
bank has already done much of its job. 
    Annual inflation eased to 5.59 percent in January, its
lowest level in more than a year, but still remains at the upper
end of the official target range of 2.5 percent to 6.5 percent.
A possible increase in energy rates due to a severe drought and
naggingly high services prices will keep inflation under
pressure this year, analysts say. 
    The stability of the Brazilian real, despite the
recent sell-off in emerging market assets, is another reason the
bank may opt to bring the tightening cycle to an end soon. 
    The central bank has said a weaker real dilutes some of the
effects monetary policy has over inflation. A weaker real
increases the value of imported goods, which Brazilians continue
to snap up at a rapid pace.  
    Most private economists expect the bank to raise interest
rates to 11.25 percent by the end of 2014, according to a weekly
central bank poll.
    Another factor that could ease pressure on the central bank
to keep raising rates is a new effort by the government to limit
spending this year.
    Last week, the Rousseff administration pledged to freeze 44
billion reais ($18.8 billion) in spending to meet a more
"realistic" fiscal savings goal this year. The government has
promised more fiscal austerity in a bid to regain investors'
trust after missing the target in the last two years.  
    If the government follows through on its promises to limit
spending it could help the central bank control inflation by
slowing the rate of consumption. 

 (Editing by Anthony Boadle; Editing by Ken Wills)