Brazil keeps rates steady, sees no room for cuts yet

By Alonso Soto

BRASILIA (Reuters) - Brazil kept interest rates on hold for the eighth straight time on Wednesday as expected, in the first decision of a new central bank board that said it was too soon to cut rates despite a crippling recession.

The nine-member board voted unanimously to leave the benchmark Selic rate (BRCBMP=ECI) at 14.25 percent, a nearly 10-year high. The rate has remained unchanged for a year.

"Taken together, the basic scenario and current balance of risks indicate there is no room to flexibilize monetary policy," the bank said in a longer and more detailed decision statement, released online shortly after the meeting ended.

The bank's new governor Ilan Goldfajn is aiming to improve communication and recover the credibility of a central bank that has failed to hit the 4.5 percent centre of its official inflation target since 2010.

In the statement, the bank said its own 2017 inflation forecast dropped to the official target of around 4.5 percent from 4.7 percent previously, but warned of lingering risks to reaching that goal. Annual inflation likely remained close to 9 percent in mid July. [L1N1A519J]

Uncertainty about the interim government's capacity to approve bold austerity measures and persistently high short-term inflation could complicate the bank's goal to contain price increases, the bank said.

"The text format changed completely, but the main message remained the same: The conditions for interest rate cuts are not there yet and it seems they will not be there in the very short term," said Luciano Rostagno, chief strategist with Banco Mizuho in Sao Paulo.

Rostagno said he expects rates to remain on hold at the bank's next rate-setting meeting on Aug. 31.

Despite a crippling recession now in its second year, Goldfajn has vowed to keep rates unchanged as long as needed to curb inflation expectations in a country scarred by hyperinflation as recently as the early 1990s.

Most emerging-market economies, including recession-hit Russia and China, are forecast to either cut rates or keep monetary policy loose as the world economy continues its long and sluggish recovery.

The tough inflation-fighting stance of Goldfajn, who stepped down as Itau Unibanco's chief economist to lead the central bank in June, has largely prompted economists to push back their expectations for a rate cut to October.

A few economists believe the bank may wait until November to start cutting rates if inflation expectations remain high.

(Additional reporting by Flavia Bohone in Sao Paulo; Editing by Daniel Flynn, Brad Haynes and Andrew Hay)