June 8, 2012 / 12:57 PM / 8 years ago

UPDATE 2-Brazil signals more rate cuts as inflation slows

* Cbank reiterates more rate cuts should be done “sparingly”

* Global crisis ensuring inflation stays low, minutes say

* Bank cut rate to record-low 8.5 pct at meeting last week

* Analysts see bank keeping pace of rate cuts at 50 bps

By Guillermo Parra-Bernal and Alonso Soto

SAO PAULO, June 8 (Reuters) - Brazil’s central bank signaled it will keep cutting its benchmark interest rate as domestic inflation falls toward the target, testing the boundaries on record low rates to jump-start Latin America’s largest economy.

The bank’s Monetary Policy Committee said in the minutes of its last policy meeting that it sees decreasing risks stemming from a mismatch in supply and demand growth, as well as a potential gain in consumer prices.

The bank’s committee, known as the Copom, maintained its guidance that more rate cuts should be conducted “sparingly.” Policymakers unanimously cut its benchmark Selic rate for a seventh straight time to a record low 8.50 percent on May 30 as a once-booming economy stalled in the last three quarters.

“The Copom considers that at this time the risks for the trajectory of inflation remains limited,” the minutes said. “The committee notes that, given the fragility of the global economy, the impact of the external sector has been disinflationary.”

The Copom also reiterated that the domestic economy outlook remains favorable for this and the coming quarters. It also said that a reversal in 12-month inflation readings will lead to easing expectations of consumer price increases by market participants.

“The central bank is leaving the door open for more rate cuts, but is somewhat dependent on future data,” said Alberto Ramos, head of Latin America economic research for Goldman Sachs. “If the external scenario deteriorates and domestic economic conditions remain weak, the committee might extend the easing cycle further.”

Like Ramos, most market economists forecast the bank will lower the its benchmark rate, the Selic, to 8 percent this year, meaning it will keep the pace of rate cuts at 50 basis points at its next rate-setting meeting on July 11.

Yields on interest rate futures contracts fell across the board on Friday, indicating that more rate cuts are looming.

The yield on the rate futures contract due in January 2013 , the most widely traded in São Paulo’s BM&F commodities and futures exchange, fell 7 basis points to 7.82 percent. Markets in Brazil were closed on Thursday for the observance of a national holiday.

The yield indicates investors’ expectations for the Selic at the end of this year.

The yield on the January 2014 contract tumbled 10 basis points to 8.18 percent, while that for the contract due in October this year fell to 7.94 percent from 8 percent on Wednesday.

AGGRESSIVE EASING

Brazil has led one of the most aggressive easing cycles among emerging-market nations, cutting 400 basis points off its rate since August to shield its economy from a worsening debt crisis in Europe.

The central bank is at the heart of President Dilma Rousseff’s crusade to revive the economy and bring down some of the world’s highest interest rates.

Rousseff has unleashed a flurry of tax cuts for consumers, but many analysts say the country’s consumption-led growth model is reaching its limits as Brazilians become increasingly indebted and businesses struggle with high labor costs and low productivity.

Brazil’s economy again disappointed in the first quarter, growing only 0.2 percent versus the fourth quarter of last year and raising pressure on Rousseff to do more to revive activity.

That slower growth has helped ease price pressures in Brazil. Annual inflation slowed for its eighth month in a row in May to hit its lowest level in 20 months.

The annual inflation rate is falling near the center of the official target range of 4.5 percent - plus or minus two percentage points.(Additional reporting by Asher Levine, Patricia Duarte, Camila Moreira, Natalia Cacioli and Reese Ewing in São Paulo; Editing by W Simon)

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