March 27, 2018 / 11:51 AM / in a year

UPDATE 2-Brazil central bank may need 'some time' to halt rate cuts

(Adds details, market reaction)

By Bruno Federowski

BRASILIA, March 27 (Reuters) - Brazil’s central bank may take “some time” to evaluate the economic outlook before halting interest rate cuts, the minutes of its last policy meeting showed on Tuesday, suggesting its forecast for a final reduction in May may be premature.

The bank last week cut the benchmark Selic rate by 25 basis points to 6.50 percent as a string of underwhelming price figures kept a lid on inflation expectations for both this year and next.

The bank said then that it would likely pursue another 25 basis-point reduction in May and then keep rates steady in June, as long as the economy develops as expected. But the minutes of that meeting showed some policymakers preferred to take a more cautious stance.

“Some members expressed a preference for indicating that it should be necessary to wait for a few Copom meetings, until sufficient information is gathered to assess the behavior of the economy,” the minutes said, referring to the central bank’s regular policy meetings.

This raises the prospect that the most dramatic cycle of interest rate cuts in a decade, which brought the Selic rate down from a 10-year high of 14.25 percent to an all-time low, could continue for longer than expected.

The minutes highlight how the bank was surprised by the recent weakness in inflation after hinting just a month and a half ago that it planned to hold the Selic at 6.75 percent.

Inflation has been stagnant below the lower bound of the official target range of 4.5 percent plus or minus 1.5 percentage points, amid double-digit unemployment rates and widespread idle capacity.

Though the economy has resumed growth after the deepest recession in decades, the recovery has been slower than expected. Meanwhile, wide-open presidential elections in October are likely to foster uncertainty over the outlook for interest rates.

Inflation ended 2017 below the target range for the first time ever, mostly because of an unexpectedly steep food price deflation driven by a record harvest. The bank has repeatedly stressed that it should not adjust monetary policy in response to one-off price shocks.

The minutes, however, highlighted that underlying inflation, which strips the measure of volatile categories, has been muted and that expectations have continued to decline even as interest rate forecasts fell.

Yields on interest rate futures were slightly lower in early trading as investors increased bets on additional future rate cuts. (Reporting by Bruno Federowski Editing by Chizu Nomiyama and Steve Orlofsky)

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