May 8, 2019 / 9:44 PM / a year ago

UPDATE 2-Brazil central bank holds rates, flags weak start to 2019

(Adds detail, context, quotes)

By Jamie McGeever

BRASILIA, May 8 (Reuters) - Brazil’s central bank kept its benchmark Selic interest rate on hold at a record-low 6.50 percent on Wednesday as expected, noting that inflation risks are roughly balanced although the economic slump of late 2018 looks to have carried into 2019.

Uncertainty about the government’s fiscal reforms and concerns about a global slowdown have kept the bank’s monetary policy committee, known as Copom, in a holding position, but policymakers flagged growing concern about sputtering domestic growth.

In voting unanimously to keep the Selic rate unchanged for the ninth straight meeting, Copom highlighted the longer-term downside risks to inflation from growing slack in the economy.

“Recent data on economic activity suggest that the softening observed at the end of 2018 continued in early 2019,” the policymakers wrote in a statement explaining their decision, adding: “Although the risk associated with economic slack has increased at the margin, the balance of risks is symmetric.”

The statement’s slightly dovish tilt did not alter the broad thrust of its forward guidance, which remained neutral and open-ended, economists said.

Some economists think the economy may have shrunk in the first quarter, and there is little to suggest much improvement in the second. Recent data showed a steep fall in industrial output and the first downturn in service sector activity in six months.

But Copom is widely expected to eschew rate cuts and keep the Selic on hold at 6.50 percent all year, partly because slow progress on the government’s pension reform bill is clouding the economic outlook and putting financial markets on edge.

“Copom will only begin to assess the need for possible interest cuts after concrete signs of an effective pension reform approval in Congress,” said Mauricio Oreng, senior Brazil strategist at Rabobank in Sao Paulo.

Copom repeated its view from its policy statement in March that the balance of risks to inflation are “symmetric”. Previously, it had stated that risks were tilted to the upside.

Inflation has ticked up this year, but there is a dovish shift underway among economists and investors, if not Copom members. Figures on Friday are expected to show it hit 5.0 percent in April for the first time in over two years.

Out of 15 respondents in the latest Reuters poll who gave a 12-month outlook, nine said the bias was neutral, five said to the downside, and only one said to the upside. For now, Copom members remain more balanced.

“I was surprised by the absence of comments on inflation at the margin, which has suffered some significant (upside) shocks,” Rafael Cardoso, economist at Daycoval Asset Management in Sao Paulo, wrote in a note.

$1 = 3.9300 Reporting by Jamie McGeever Editing by Brad Haynes, Alistair Bell and Lisa Shumaker

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