Brazil not ruling out rate hikes despite disinflation hopes -source

By Alonso Soto and Silvio Cascione

BRASILIA, Feb 3 (Reuters) - Brazilian policymakers have not ruled out hiking interest rates in coming meetings even as a gloomier global economy raises hope that double-digit inflation will drop sharply this year, a senior government official told Reuters on Wednesday.

The Brazilian central bank surprised markets by keeping its Selic rate on hold at 14.25 percent at its last meeting after signaling tighter monetary policy to curb 12-year high inflation.

Some market economists and even members of President Dilma Rousseff's administration have said that there is room for rate cuts at the end of the year to ease the pain of a crippling recession.

The senior official, who is knowledgeable about economic policy, said inflation expectations need to drop near the 4.5 percent target center before officials consider cutting rates. However, in recent weeks, inflation forecasts have increased.

He said central bank policymakers, including governor Alexandre Tombini, stood ready to increase interest rates further, if inflationary pressures picked up.

"Tombini and everybody have been pretty clear that if they need to hike rates again they will," said the official, who requested anonymity to speak freely. "No one said that necessarily the next step in rates will be to cut."

Yields on interest rate futures <0#2DIJ:> jumped on the comments, traders said, trimming investor bets on a rate cut in the near future.

Unlike its peers in Mexico and Chile, the Brazilian central bank does not enjoy complete independence. Other government officials have told Reuters that the administration is worried more rate hikes will hamper its plans to revive the economy.

Rousseff, a leftist economist, said last month that while the central bank has autonomy to make its decisions, it is still accountable to the rest of the government.

At its last meeting on Jan. 20, the central bank monetary policy committee vote was split in its vote with two of the eight board members calling for a 50-basis-points rate hike.

The rest decided to keep rates steady as they expect a deepening recession and lackluster global economy to curb inflation.

The official said the government is convinced inflation will drop this year, but there are disagreements over how fast.

Annual inflation stands near 11 percent and market expectations for this year and next remain well above the target center, at 7.26 percent and 5.80 percent respectively, according to the latest central bank poll of economists.

The difference in opinion about monetary policy within the government reveals the challenges the Rousseff administration faces to convince investors it has a cohesive plan to pull the economy out of its worst recession in decades.

An unpopular Rousseff, who faces impeachment proceedings in Congress, is under tremendous pressure from her own Workers' Party to jump-start the economy with more and cheaper credit as hundreds of thousands of Brazilian lose their jobs.

The official echoed the opinion Rousseff and Finance Minister Nelson Barbosa that recent measures to expand credit will not complicate efforts to lower inflation. Credit constrains may actually keep companies from cutting prices to protect their margins, he added.

He said using part of the country's $370 billion in international reserves could trigger capital outflows as the country remains a net external debtor.