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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 on Thursday it will continue to hike interest rates to battle inflation that remains persistently high despite a stronger local currency.

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

"There is really no difference between this and the last minutes and that signals that they intend to keep the pace of rate hikes, meaning another 50 basis points at the next meeting," said Gustavo Rangel, chief Latin America economist for ING in London.

"The scenario has not changed enough for them to change guidance. They remain relatively hawkish, which is good because it will help the bank consolidate a more benign outlook for inflation," he said.

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

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

The real continued to firm on Thursday morning as a last-minute deal in Washington to avert a U.S. debt default failed to ease fears of future fiscal problems in the world's largest economy.

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


The Brazilian central bank's monetary policy committee unanimously voted to hike the Selic rate by 50 basis points to 9.50 percent on Oct. 9 to reduce inflationary pressures that threaten a slow-moving recovery in Latin America's largest economy.

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

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

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

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

Brazil is one of the few countries in the world hiking interest rates at a time when emerging-market peers like Mexico and Poland are slashing borrowing costs to cope with an overall slowdown.

Many emerging economies like Brazil blame the slowdown on erratic communication from the U.S. Federal Reserve that has signaled an imminent withdrawal of monetary stimulus.

The expectation of a reduction in the Fed's bond-buying program triggered a massive exodus of capital from emerging economies as investors dropped riskier assets to return to the United States.

However, some investors warn that a late Fed taper could do more harm to emerging market nations, which should focus on reforming their own economies to face higher borrowing costs ahead.