UPDATE 1-Brazil central bank holds interest rates, nods to fiscal policy

(Adds details of Copom statement, policy context) By Marcela Ayres BRASILIA, May 3 (Reuters) - Brazil's central bank on Wednesday held interest rates at a sixth consecutive policy meeting and said it was "less likely" to resume hikes, while recognizing that the government had eased concerns about fiscal policy with proposed new budget rules. The bank's rate-setting committee, known as Copom, held its benchmark Selic interest rate at a six-year high of 13.75% as expected by all 40 economists polled by Reuters. In the statement explaining their decision, policymakers said the government had helped to allay doubts about fiscal policy. A recurring reference to the chance of renewed rate hikes was modified to call it "a less likely scenario." "The reinstatement of fuel taxes and, primarily, the presentation of a proposal for the fiscal framework have partly reduced the uncertainty arising from fiscal policy," the committee wrote.

Brazil's central bank directors have said the new fiscal rules, which are pending congressional approval, do not have an automatic effect on the level of interest rates. Instead, they have stressed that the key for monetary policy will be how fiscal measures affect inflation expectations, which have been drifting away from official targets.

Wednesday's policy statement dropped a reference from prior rate-setting meetings to "deteriorating" long-term inflation expectations. Policymakers held their inflation projections at 5.8% for 2023 and 3.6% in 2024, unchanged from their last rate-setting meeting. They acknowledged that market forecasts from a weekly survey had "increased marginally" to around 6.1% and 4.2% for this year and next, respectively.

When Brazil's central bank paused its aggressive tightening cycle in September after lifting rates from a record-low 2% in early 2021, annual inflation was running at 8.73%. By contrast, consumer prices rose just 4.16% in the 12 months to mid-April.

The central bank is officially targeting inflation of 3.25% in 2023 and 3% in 2024, with a tolerance margin of 1.5 percentage points up or down.
(Reporting by Marcela Ayres Editing by Brad Haynes)