UPDATE 4-Brazil cenbank leaves door open for smaller rate hikes
(Recasts; adds central bank chief, analyst comments)
BRASILIA/SAO PAULO, Dec 5 (Reuters) - Brazil's central bank on Thursday signaled it could slow one of the world's most aggressive monetary tightening cycles, but warned that currency volatility could limit the impact of past interest rate hikes on inflation.
In the minutes from its last rate-setting meeting, the bank acknowledged that recent rate hikes had a lagging effect on inflation, which was interpreted as a hint that policymakers may not need to increase borrowing costs much more to tame prices.
At that meeting the central bank raised its benchmark Selic interest rate by 50 basis points to 10 percent, changing the wording of its previous decision statement in an indication that it may focus more on economic growth than inflation.
However, central bank chief Alexandre Tombini did not rule out another bold rate hike, saying heightened currency volatility could hinder the effects of monetary policy.
"There is some degree of uncertainty over the intensity with which inflation will react to (monetary) policy actions," Tombini said during a speech in Sao Paulo later on Thursday. "It is natural for that uncertainty to increase with the current volatility in financial markets."
He added that the bank will continue with a multi-billion dollar daily intervention program to minimize that risk.
The real, which has shed 6 percent of its value in just over a month, rallied over 1 percent after Tombini's comments.
"Tombini followed the line of the minutes by placing the currency as the main variable to decide future monetary policy," said Luis Otavio Leal, chief economist with Banco ABC Brasil in Sao Paulo. "By mentioning uncertainty he is signaling caution."
Tombini is under heavy pressure to end a monetary cycle that has added 275 basis points to the Selic to avoid undermining an already fragile recovery of Latin America's largest economy.
A larger-than-expected contraction of the economy in the third quarter underscored the difficulties President Dilma Rousseff faces to jump start an economy that has struggled to grow during her three years in office. The Brazilian economy shrank 0.5 percent in the third quarter versus the previous one after a sharp fall in investment.
Those disappointing growth figures may push the 8-member monetary policy committee to opt for a smaller rate hike at its Jan. 15 meeting even if inflation remains high.
In the minutes, the bank said its own projections for inflation this year fell when compared to the previous meeting, while its inflation forecast for 2014 remained stable.
The return to double-digit interest rates marked a setback for Rousseff, a leftist economist who has promised to bring down borrowing costs. At 10 percent, the Selic is one of the highest benchmark interest rates among major economies.
Finance Minister Guido Mantega has already blamed rising rates for having "some impact" on economic growth so far this year, in what some analysts saw as a message to monetary policy authorities.
Annual inflation has eased since peaking in June but remains well above the center of the target of 4.5 percent, plus or minus two percentage points. Brazil's benchmark IPCA consumer price index rose 5.84 percent in the 12 months through October.
A smaller-than-expected increase in domestic fuel prices announced last week means less inflationary pressure for what's left of this year. However, lack of clarity about a new formula to adjust fuel prices in the future raised further doubts about the government's ability to keep inflation in check.
The rapid deterioration of Brazil's fiscal accounts in the last two years has also taken a toll on Rousseff's credibility, prompting warnings of a credit downgrade from major rating agencies as the budget deficit widens.
Rousseff has promised to rein in spending and roll back some tax breaks to replenish state coffers, but the government's over reliance on extraordinary revenues to meet fiscal targets has been harshly criticized by investors.
Fears of an exodus of foreign capital when the United States starts to unwind its massive stimulus program could also hit the Brazilian economy in coming months.
(Additional reporting by Brad Haynes, writing by Alonso Soto; editing by Todd Benson, W Simon and Chris Reese)