EMERGING MARKETS-Brazil yield curve flattens after central bank holds rates

BRASILIA, May 17 (Reuters) - Yields on short-term Brazilian interest rate future contracts jumped on Thursday after the central bank unexpectedly left its benchmark rate untouched, while the Brazilian real outperformed its peers. The bank kept the Selic rate at 6.50 percent, contradicting widespread expectations of a 25 basis-point cut. Policymakers attributed the decision to "the recent change in the balance of risks to prospective inflation," which economists widely understood as a reference to the recent global emerging-market currency selloff. Short-term rate yields spiked in early trading as investors adjusted their bets following the interest rate surprise. Long-term yields slipped due to expectations that tighter monetary policy in the short-term may allow the central bank to hike rates less than expected in the future. The Brazilian real also found some support in the central bank move, weakening less than its Latin American peers as emerging markets extended their recent losses across the board. "Markets will take the surprising decision as a sign that the central bank is concerned with the current emerging market environment and its implications on the pace of depreciation," economists at Nomura Securities wrote in a report. "In other words, market could read the decision as a sign that the central bank is committed to take further steps to avoid outsized pressure" on the currency. The central bank has already sold currency swaps to cushion the currency's decline, which has been underpinned by concerns that a widening U.S. fiscal deficit and accelerating inflation could bump up U.S. interest rates. Yet Nomura economists said the relief in the Brazilian real is likely to be temporary as the October presidential elections, set to be the most hard-to-predict in decades, weigh on appetite for the nation's assets. "We expect the real to return to its underperformance path in the short term, unless there is a clear change in the presidential election landscape, with signs that a pro-market candidate is likely to win," the report said.

Key Latin American stock indexes and currencies at 1330 GMT:

Stock indexes daily YTD % % change Latest change MSCI Emerging Markets 1148.24 -0.59 -0.29 MSCI LatAm 2806.08 -0.7 -0.08 Brazil Bovespa 85356.46 -1.36 11.72 Chile IPSA 5730.72 0.05 2.99 Chile IGPA 28977.29 0.07 3.56 Currencies daily YTD % % change

Latest change

Brazil real 3.6789 -0.03 -9.94 Mexico peso 19.7110 -0.72 -0.06 Chile peso 631.51 -0.17 -2.67 Colombia peso 2872.34 -0.46 3.82 Peru sol 3.27 -0.21 -1.01 Argentina peso (interbank) 24.1000 0.79 -22.82 Argentina peso (parallel) 24.9 -0.40 -22.77

(Reporting by Bruno Federowski Editing by Susan Thomas)