UPDATE 2-Brazil weighed 25 bps cut but inflation still high

Thu Dec 18, 2008 9:33am EST
(Adds economist comments, rate futures' reaction)
By Elzio Barreto
SAO PAULO, Dec 18 (Reuters) - Brazil's central bank said it considered cutting benchmark borrowing costs by 25 basis points last week, but that policy-makers decided to keep rates on hold because of persistently high inflation.
In minutes released on Thursday from its rate-setting meeting last week, the bank's monetary policy committee said domestic demand has expanded at a "less intense" rate, helping to slow down the economy.
The bank's committee, known as the Copom, voted unanimously to keep the benchmark Selic lending rate at a two-year high of 13.75 percent but then said most of its eight members considered a rate cut. It opted to pause for a second straight meeting, citing "great uncertainty" in the economic outlook.
Interest-rate futures fell after the release of the central bank minutes as investors priced in a rate cut when the Copom holds its next scheduled meeting on Jan. 20-21.
The contract for January 2010 delivery <0#dij:>, the most widely traded on the BM&F commodities and futures exchange, dropped to 12.42 percent from Wednesday's close of 12.51 percent.
The contract indicates investors' expectations for the benchmark Selic rate at the end of December 2009.
SLOWDOWN CONCERN
The outlook for economic activity has deteriorated as the turmoil in global markets prompt banks in Brazil to slash credit that fueled demand the past months, the central bank said. A deepening of the global crisis may also further erode consumer and business confidence, it said.
Policy-makers may cut the Selic rate as soon as January as Brazil's economy hits the breaks, helping to contain inflation expectations as businesses cut prices to lure consumers, economists said.
"There is a strong shift in their discussion over economic activity, which is understandable given the recent indicators," said Zeina Latif, chief Brazil economist at ING in Sao Paulo. "At the margin, the central bank is less concerned about the exchange rate now and has shifted a lot their diagnosis of economic activity, resulting in a decline in projected inflation."
The Selic will drop by 25 basis points in January and end 2009 at 12.5 percent, Latif forecast. Market analysts expect the Selic to fall as far as 13 percent next year, according to the latest central bank survey.
Central banks around the globe have slashed borrowing costs to ease the impact of a credit crunch that has already pushed major economies such as the United States and Japan into recession.
In Brazil, policy-makers have shifted their focus to minimizing the risks for a sharp slowdown in Latin America's biggest economy after raising rates from April to October to keep inflation in check.
Data released the past weeks showed a slump in Brazil's industrial production and the first drop in retail sales in eight months. Companies from mining giant Vale to automakers Fiat and General Motors have put thousands of workers on leave, scaled back output and reduced investments on expectations over a slowdown in 2009.
For the central bank minutes please see: www.bcb.gov.br/?COPOM139