December 11, 2014 / 11:39 AM / 5 years ago

UPDATE 2-Brazil central bank signals smaller interest rate hike

(Adds analysts’ comments and details from minutes)

By Alonso Soto

BRASILIA, Dec 11 (Reuters) - Brazil’s central bank signaled on Thursday it may slow the pace of monetary tightening at its next meeting as it expects the government to limit spending and inflation to ease in coming years.

In the minutes of its last rate-setting meeting, the bank said inflation could accelerate in the short term and remain high, but price increases should begin to slow in 2015.

The central bank last week raised its Selic rate by 50 basis points to 11.75 percent, stepping up monetary tightening to battle inflation and reinforce President Dilma Rousseff’s efforts to regain investors’ confidence.

The bank hinted then it may reduce the size of future rate increases given the lagging effects of previous monetary tightening.

In the minutes, the bank reinforced that message with expectations that inflation would subside gradually starting in 2015.

“It (the bank) anticipates that inflation is likely to remain high in 2015, but next year it should enter a long period of decline,” the text said.

It added that the bank sees inflation converging toward the center of the official target, 4.5 percent, in 2016. The inflation target ranges from 2.5 percent to 6.5 percent.

The bank also said fiscal policy could turn contractionary next year amid government promises to keep spending in check and reduce subsidies to state-run banks.

“The central bank is signaling caution by saying that it works with a long period of declining inflation,” said Alessandra Ribeiro, economist and partner with Tendencias in Sao Paulo. “The bank said that with the fiscal adjustment and a slightly higher Selic it can meet its goal.”

A contractionary fiscal policy, or less government spending, would reduce inflationary pressures.

BBVA economist Enestor dos Santos said in a research note that the bank could be forced to keep the aggressive pace of monetary tightening if the Brazilian currency continues to depreciate and the government fails to keep a lid on spending.

Central bank chief Alexandre Tombini said on Tuesday that inflation could remain above the ceiling of the official target in the next couple of months as a weaker real increases the value of imports.

Although 12-month inflation slowed slightly to 6.56 percent in November, inflation for 2014 could still clock in above the 6.5 percent target ceiling. If that materializes, it would be the first calendar year in more than a decade that inflation breached that ceiling. (Reporting by Alonso Soto; Additional reporting by Brad Haynes; Editing by W Simon)

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