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EMERGING MARKETS-Brazil's real drops on dovish c.bank, sol flat after bumper gains

·3 min read
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* Annual inflation in Brazil jumps to highest since 2016 in April * Chile's economy will grow 12% in the second quarter - poll * Mexico expected to leave rates unchanged on Thursday By Shashank Nayar May 11 (Reuters) - Brazil's real eased on Tuesday after minutes of the central bank's recent meeting struck a dovish tone on interest rates, while most other Latin American currencies fell as fears of a spike in U.S. inflation weighed. Brazil's real dropped nearly 1% from a four-month high, while the MSCI's index of Latam currencies fell 0.3%. Minutes from the Brazilian central bank's last policy meeting showed the bank expects to sharply hike interest rates at its next meeting to check inflation, but suggested it is unlikely to make an uninterrupted cycle of hikes to a 'neutral' level. The minutes disappointed investors who were hoping for the bank to aggressively hike rates to reduce inflationary pressures next year. Anticipation of this had spurred gains in the real. Annual inflation in Brazil rose to 6.8% in April, the highest since 2016, exactly in line with the median forecast in a Reuters poll. Steadily rising inflation comes against the backdrop of stretched public finances in Brazil, which threaten to destabilize the economy. "Failure to address medium-term fiscal sustainability, and rising short- and medium-term political risk/policy could generate pressure on the capital account, un-anchor the currency and inflation expectations and through those channels contribute to the deterioration of the inflation outlook," Goldman Sachs analysts wrote in a note. The Peruvian sol eased 0.1% after recording its best day in more than five years, as opinion polls showed the gap closing between socialist front-runner Pedro Castillo and the right-wing Keiko Fujimori ahead of the June 6 presidential elections. Most other commodity-focussed Latin American currencies, including the Chilean and Colombian pesos, fell between 0.3% and 0.4%, while Mexico's peso was the only currency to gain as investors braced for a report on Wednesday showing a possible spike in U.S. inflation. Mexico's central bank will likely keep its benchmark interest rate unchanged at its next monetary policy meeting on Thursday, as inflation surges well above target during an economic recovery from the COVID-19 pandemic, a Reuters poll showed. Chile's economy will grow 12% in the second quarter, a Central Bank poll forecast showed on Tuesday, while economic activity in world's top copper producer is set to soar 9.5% in April alone, the poll of analysts said. The dollar index, held steady as investors waited to see if Wednesday's report would push the U.S. Federal Reserve to alter its stance on inflation. Key Latin American stock indexes and currencies: Stock indexes Latest Daily % change MSCI Emerging Markets 1325.87 -1.52 MSCI LatAm 2501.95 -0.96 Brazil Bovespa 121441.6 -0.38 8 Mexico IPC 49425.49 -0.89 Chile IPSA 4525.64 -1.5 Argentina MerVal - - Colombia COLCAP 1296.46 -1.16 Currencies Latest Daily % change Brazil real 5.2528 -0.49 Mexico peso 19.8455 0.38 Chile peso 697.9 -0.14 Colombia peso 3706.48 -0.06 Peru sol 3.721 -0.01 Argentina peso 93.95 -0.02 (interbank) (Reporting by Shashank Nayar in Bengaluru)