UPDATE 1-Risks to Brazil benign prices scenario seen lower

* Central bank sees policy tools gaining efficiency

* Future actions hinge on global slowdown, local growth

* Bank seen keeping rates unchanged at October meeting
(Recasts to explain rate decision, adds background, comments
in paragraphs 1-6; adds interest rate bets in paragraph 7-8)

By Guillermo Parra-Bernal and Elzio Barreto

BRASILIA, Sept 9 (BestGrowthStock) – Brazilian central bank policy
makers said on Thursday that risks to a benign inflation
scenario in the country are falling because of higher borrowing
costs and the reversal of economic stimulus measures that
bolstered activity during a short-lived recession last year.

Inflation in the country is more likely to converge to the
mid-point of the bank’s target at 4.5 percent, despite some
risks that include rising wages and factory capacity strains,
the bank’s board of directors said in minutes of its
rate-setting meeting the previous week released on Thursday.

Economic slowdown in the largest industrialized nations is
also helping put a lid on domestic prices, the minutes said. In
the opinion of central officials, the “advanced maturing stage”
of Brazil’s inflation-targeting regime is giving policymakers
enough leeway to act prudently and not overreact in order to
keep inflation under control.

The central bank’s monetary policy committee, known as
Copom, kept its benchmark Selic interest rate at 10.75 percent
last week, putting an end to a 200-basis-point tightening cycle
that began in April.

“In spite of the recognition that there are risks to an
increase in the inflation rate in the short term, the Copom
reckons that a trend in which prices will converge to the
mid-point of the target will come into effect,” the minutes
said.

Policymakers are signaling their comfort with recent
economic data pointing to a soft landing in economic growth,
which had been explosive over the past two quarters. The
inflation target has a plus or minus leeway of two percentage
points.

Yields on interest rate futures contracts tumbled following
the release of the minutes and after the government reported on
Thursday that inflation came in at a lower-than-expected 0.04
percent in August.

The yield on the contract due in January 2012 (DIJF2: ), the
most widely traded in Sao Paulo, fell to 11.30 percent on
Thursday from 11.36 percent.

The yield for the contract due in October 2010 (DIJV0: ) was
unchanged at 10.62 percent, indicating that investors expect
the bank to keep rates unchanged when they meet again to
discuss interest rates next month.

Inflation, after jumping to 5.3 percent in the 12 months
through April, slowed to 4.6 percent in July and should
probably be 4.5 percent in August, according to Credit Suisse.

Economic growth slowed to 1.2 percent in the second quarter
from the previous three months, compared with 2.7 percent in
the first quarter.
(Additional reporting by Ana Nicolaci da Costa; Editing by
James Dalgleish)

UPDATE 1-Risks to Brazil benign prices scenario seen lower