UPDATE 2-Brazil's central bank: Tight credit to curb prices

Thu Nov 6, 2008 11:52am EST
(Adds economist's comments, interest-rate futures)
By Elzio Barreto
SAO PAULO, Nov 6 (Reuters) - Brazil's central bank said a deepening global credit crisis may intensify the effects of rate increases in the country as available credit is reduced, helping to keep inflation in check.
In minutes released on Thursday from its rate-setting meeting last week, the bank's monetary policy committee also said the outlook for economic activity in Brazil has become more uncertain because of the international markets turmoil.
"The effects of the international crisis on domestic financial conditions indicate that the contribution of credit to the support of domestic demand may lose steam in a more intense form that what would be determined exclusively by monetary policy," the bank said in the minutes.
The monetary policy committee, known as the Copom, voted unanimously to keep the benchmark Selic lending rate at a two-year high of 13.75 percent, changing tack after four straight rate hikes.
Brazilian policy-makers shifted their focus away from inflation and on to minimizing the risks for growth in Latin America's biggest economy as a deepening turmoil in global markets pushed major economies closer to recession.
Data released on Thursday showed a steep drop in new automobile sales in October, while vehicle production fell for a third month in a row as credit became scarce and more expensive.
"Effects of the international crisis are starting to show in durable goods, like autos and appliances and credit is not really flowing to the consumer in Brazil," said Pedro Tuesta, senior Latin America economist at research firm 4Cast Inc.
"No credit, no demand, no production and the economy cools off. It works almost like the central bank is hiking."
Tuesta expects the central bank will keep rates unchanged until March 2009 to ease the impact of the global credit crunch in Brazil's economy.