(Adds comments from the minutes, market reaction, Treasury chief comment)
By Alonso Soto
BRASILIA, Oct 29 (Reuters) - Brazil’s central bank said on Thursday it will remain vigilant to battle inflation that is under pressure from a widening budget deficit and a sharp fall in the country’s currency.
In the minutes of its Oct. 21 policy meeting, the bank said that the “intense” impact of a weakening Brazilian real and uncertainty over fiscal results are complicating efforts to lower near double-digit inflation.
“In that context, the committee believes that monetary policy should remain vigilant regardless of other policies,” the bank minutes said.
The bank also acknowledged it was no longer pursuing its self-imposed goal of bringing inflation back to the 4.5 percent center of the official target range in late 2016, aiming instead to lower inflation “in a relevant horizon”.
Annual inflation is currently running at 9.77 percent, well above the target range of 2.5 percent and 6.5 percent for this year, even as Brazil’s economy is widely forecast to contract by about 3 percent.
After the minutes were released, yields of interest rate futures rose <0#2DIJ:> across the board on Thursday, traders said.
The bank’s monetary policy committee, Copom, last week kept its benchmark interest rate unchanged at 14.25 percent and used the term “vigilant,” as it did after it previous meeting, to mean it did not rule out another rate hike.
“Further fiscal slippage is a risk for the Copom’s plan of keeping the Selic rate unchanged for some time and the main reason for it to remain vigilant,” said Enestor dos Santos, economist with BBVA.
Brazil’s worst recession in 25 years has battered revenues, swelling the overall budget deficit to 9.21 percent of gross domestic product in the twelve months to August.
The country’s primary balance, or the difference between revenues and expenditures prior to interest debt payments, is expected to record its biggest deficit ever this year. The primary result is closely watched by investors as a gauge of a country’s ability to service its debt.
Brazil in August posted a primary deficit of 7.310 billion Brazilian reais ($1.83 billion) for August. . The overall budget deficit in August was 57.01 billion reais.
The government dropped plans to deliver a small primary surplus this year and instead forecasts a deficit of 51.8 billion reais for 2015 - its second straight annual shortfall.
Treasury chief Marcelo Saintive on Thursday said that deficit could climb to over 110 billion reais if the government is forced to pay hefty debts with state-run banks. (Additional reporting by Silvio Cascione and Marcela Ayres Editing by W Simon)