August 1, 2018 / 9:35 PM / 10 months ago

UPDATE 2-Brazil keeps rates at record low, downplays 'temporary' inflation spike

(Recasts top of story, adds analyst comment)

By Marcela Ayres and Bruno Federowski

BRASILIA, Aug 1 (Reuters) - Brazil’s central bank kept interest rates at an all-time low on Wednesday and downplayed a recent spike in inflation, suggesting no rate hikes in the immediate future.

The effect of a nationwide truckers’ strike on prices is likely to fade but will probably further slow a recovery in Latin America’s top economy, the bank said, underscoring the outsized impact of the late-May protests.

The bank’s nine-member monetary policy committee, known as Copom, kept the benchmark Selic rate at 6.50 percent for a third straight meeting, after cutting it by 775 basis points since October 2016. All 40 economists polled by Reuters expected the bank to stand pat.

Product shortages due to the protests lifted inflation past the midpoint of the central bank’s target range for the first time in over a year. High unemployment and widespread idle capacity had previously kept inflation below the target’s midpoint for months.

Yet “recent data corroborate the view that these effects should be temporary,” the bank’s statement said. “Measures of underlying inflation are still running at low levels.”

The dovish outlook highlights how policymakers were caught by surprise by an underwhelming economic pickup, which took a further blow after the strike nearly paralyzed key corporate sectors in late May.

Most economists in the Reuters poll expected the bank to wait until at least 2019 before raising rates.

“The flight plan delineated by the central bank remains in play - that is, keeping rates at a low level in the foreseeable future,” Haitong economist Jankiel Santos said.

That outlook could change, however, depending on the presidential elections in October, which are set to be the hardest to predict in decades.

Keeping a lid on inflation hinges on a series of “reforms and necessary adjustments in the Brazilian economy,” the bank said, a reference to measures such as a social security reform that economists see as key to curbing growth of public debt.

If the winner of the elections refrains from committing to such an agenda, that could drive the central bank to begin raising rates sooner rather than later, Santos said. (Reporting by Marcela Ayres and Bruno Federowski Editing by James Dalgleish)

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