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Brazil central bank unlikely to raise rates now as economy sputters, minutes show

Credit: REUTERS/ADRIANO MACHADO

Brazil's central bank does not expect to raise interest rates in the immediate future because of an unusually high degree of economic uncertainty, minutes from its last policy meeting showed on Tuesday, although fiscal risks could prompt it to tighten policy faster than its baseline scenario suggests.

By Jamie McGeever

BRASILIA, Jan 26 (Reuters) - Brazil's central bank does not expect to raise interest rates in the immediate future because of an unusually high degree of economic uncertainty, minutes from its last policy meeting showed on Tuesday, although fiscal risks could prompt it to tighten policy faster than its baseline scenario suggests.

The minutes of the Jan. 19-20 meeting of the rate-setting committee, known as Copom, also showed that policymakers thought the COVID-19 pandemic and the end of emergency cash transfers could even temporarily throw economic growth into reverse.

Copom last week held the benchmark Selic rate at a record- low 2.00%, as expected, but ditched its forward guidance vowing to keep it there for a long time, because inflation expectations were drifting up towards target over the next couple of years.

The minutes on Tuesday reiterated policymakers' view that this does not automatically imply arate hike, which would be the first since 2015. Uncertainties over growth still require "extraordinarily strong monetary stimulus," policymakers wrote.

"The next (economic) data release will be very informative about the evolution of the pandemic, economic activity, and fiscal policy. Thus, the benefits of waiting for these releases to decide on the next steps of monetary policy outweigh the costs," the minutes said.

Policymakers still maintained that the recent spike in inflation driven by food and commodity prices is temporary. They noted, however, that it has been more persistent than they had expected and they said it bears close attention.

They also noted that although there has been no change in the fiscal situation, risks surrounding public finances could push inflation higher and force them to respond.

"The Committee also considered that fiscal risks generate an upward bias in these projections, potentially justifying an increase in policy rates earlier than that assumed in its baseline scenario," the minutes said.

(Reporting by Jamie McGeever; editing by Brad Haynes, Larry King)

((jamie.mcgeever@thomsonreuters.com; +55 (0)11 97189 3169; Reuters Messaging: jamie.mcgeever.reuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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