Brazil signals more rate hikes despite firmer currency


* Follows five consecutive interest rate increases

* Central bank minutes nearly identical to prior text

By Alonso Soto

BRASILIA, Oct 17 (Reuters) - Brazil's central bank hinted onThursday it will continue to hike interest rates to battleinflation that remains persistently high despite a strongerlocal currency.

In the minutes of its last rate-setting meeting, the centralbank repeated almost the same language from the previous minutesin a sign that policymakers could extend the rate-hiking cycle.

"There is really no difference between this and the lastminutes and that signals that they intend to keep the pace ofrate hikes, meaning another 50 basis points at the nextmeeting," said Gustavo Rangel, chief Latin America economist forING in London.

"The scenario has not changed enough for them to changeguidance. They remain relatively hawkish, which is good becauseit will help the bank consolidate a more benign outlook forinflation," he said.

The central bank raised its benchmark Selic interest rate for the fifth straight time last week, keeping thepace of monetary tightening steady in a bid to control risinginflation expectations.

Between the previous rate decision meeting and the last onethe Brazilian real firmed more than 7 percent. A strongerreal eases inflation by lowering the price of imported goods.

The real continued to firm on Thursday morning as alast-minute deal in Washington to avert a U.S. debt defaultfailed to ease fears of future fiscal problems in the world'slargest economy.

The yields of Brazil's interest rate futures opened higher on Thursday, meaning the market is betting onhigher rates ahead. An overwhelming majority of market tradersexpect the central bank to raise rates to 10 percent at its nextmeeting on Nov 27, according to Thomson Reuters data.


The Brazilian central bank's monetary policy committeeunanimously voted to hike the Selic rate by 50 basis points to9.50 percent on Oct. 9 to reduce inflationary pressures thatthreaten a slow-moving recovery in Latin America's largesteconomy.

Annual inflation hit its lowest level this year inSeptember, but at 5.86 percent remained well above the center ofthe official target of 4.5 percent - plus or minus twopercentage points.

A growing number of economists are predicting the centralbank will take the Selic back to double digits this year,considered by many a setback for President Dilma Rousseff, whovowed to bring down some of the world's highest interest rates.

"There is a big uncertainty about what happens beyond nextmeeting but it appears unlikely that the hiking cycle will endthis year," economists of Bank of America Merrill Lynch said ina note to clients.

For years, lower interest rates have been a priority ofRousseff, who is widely expected to run for re-election nextyear. A history of rampant inflation has made it difficult forpolicymakers to keep interest rates down in Brazil.

Brazil is one of the few countries in the world hikinginterest rates at a time when emerging-market peers like Mexicoand Poland are slashing borrowing costs to cope with an overallslowdown.

Many emerging economies like Brazil blame the slowdown onerratic communication from the U.S. Federal Reserve that hassignaled an imminent withdrawal of monetary stimulus.

The expectation of a reduction in the Fed's bond-buyingprogram triggered a massive exodus of capital from emergingeconomies as investors dropped riskier assets to return to theUnited States.

However, some investors warn that a late Fed taper could domore harm to emerging market nations, which should focus onreforming their own economies to face higher borrowing costsahead.

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