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BRASILIA, Feb 18 (Reuters) - There is no room for a more flexible monetary policy in Brazil, a central bank director said on Thursday, throwing cold water on growing pressure for interest-rate cuts in coming months.
Although inflation is set to decline, the high level of price indexation and the recent increase in inflation expectations require the central bank to stay vigilant, the bank's monetary policy director Aldo Mendes said at an event with investors in Sao Paulo.
"The state of inflation expectations, which are above the convergence zone, and the mechanisms that keep inflationary inertia in our economy leave no room for a flexibilization of monetary conditions," Mendes said according to his prepared remarks, published on the central bank's website.
Yields paid on short-term futures contracts in Brazil extended gains as traders added bets that benchmark rates will remain at 14.25 percent in the foreseeable future.
"(Mendes) flat out denied that there's going to be a cut", said Thiago Castro, a trader with Renascença brokerage.
Mendes also said the fiscal adjustment aimed at rebalancing the country's finances is "extremely important" but noted it requires not only technical skills but also political support. Ratings agency Standard & Poor's downgraded Brazil on Wednesday and warned of possible new cuts to the country's rating because of political uncertainties delaying needed budget measures.
As the Brazilian economy sinks into a very deep recession and inflation remains around 10 percent, the Brazilian central bank led by Alexandre Tombini has felt pressure from economists, politicians and union leaders to either cut or raise interest rates. It decided to keep rates on hold in January at 14.25 percent, in a split decision. (Reporting by Silvio Cascione and Bruno Federowski; Editing by Chizu Nomiyama and Meredith Mazzilli)