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Brazil's central bank expects interest rates to fall, despite low unemployment.

Dado Galdieri/Bloomberg

Brazil's central bank on Thursday gave the strongest signal yet it will keep slashing interest rates into single digits, even as record-low unemployment reinforced concerns that a tight labour market could stoke inflation.

The bank struck a dovish tone in the minutes of its latest monetary policy meeting. It cut interest rates for the fourth straight time, saying that a weak global economy would continue to help ease inflation pressures at home.

The minutes were released just two days after official data showed consumer prices rose more than expected in the month through mid-January, rekindling worries about naggingly high inflation in Latin America's largest economy.

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Still, the central bank stressed that the 12-month inflation rate in Brazil will continue to decline, increasing the likelihood that the benchmark lending rate – now at 10.5 per cent – will fall into single digits.

"The Monetary Policy Committee sees a high probability of a scenario that includes moving the Selic rate to single-digit levels," the bank's nine-member monetary policy committee said in the minutes.

The bank on Jan. 18 cut the Selic rate by a half percentage point for the fourth meeting in a row since August, when it surprised markets by kicking off an easing cycle in a bid to shield Brazil's economy from the global financial turmoil.

Yields on Brazilian interest rate futures fell sharply on Thursday after the minutes were released, as investors scrambled to price in lower rates going forward.

"I can't think of a stronger message from a different central bank within the emerging world; it is a very clear message," said Neil Shearing, senior economist with Capital Economics in London. "The strength of the language is surprising, the substance is perhaps less so."

Some economists see holes in the bank's justification for more aggressive cuts ahead as the global economy slowly regains its footing and rising wage demands at home keep inflation high.

Brazil's unions are demanding double-digit wage hikes while employers are struggling to find workers.

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"A few years ago we would get about three people coming in a day looking for work. Now we're lucky if we get two in a month," said Walter Fernandes Cabral, a restaurant manager in Sao Paulo. "Employees are leaving, looking for more money, and it's hard to compete because the market is offering it."

Unemployment fell to a record low of 4.7 per cent in December, adding pressure to an already tight job market that is likely to further pressure prices this year.

The central bank said structural changes to the Brazilian economy are helping to pave the way for lower interest rates, a sea change for a country that has long had some of the highest borrowing costs in the world.

Analysts were already betting on the Selic rate ending the year at 9.5 per cent, a central bank poll showed on Monday. The bank's more dovish tone could prompt even lower estimates.

Lower interest rates are a key policy goal for President Dilma Rousseff as she seeks to bolster the country's growth potential. Brazil's economic growth last year lagged that of other emerging-market giants like China and India.

Ms. Rousseff, a career technocrat-turned-politician, faces a tough juggling act to create conditions for the central bank to keep lowering rates while reviving an economy that flat-lined in the third quarter.

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She plans to move ahead with aggressive stimulus measures in effort to ensure that the economy grows at least 4 per cent this year. At the same time, her government is considering a spending freeze of more than $60-billion, part of a belt-tightening effort that the central bank has said is key to lower rates further.

The last time the central bank was able to lower the rate to single digits was in June of 2009 amid the global financial meltdown. Central bankers kept it under 10 per cent for about a year, but creeping inflation pushed rates higher.

The bank is betting that a slowing global economy will ease price pressures in Brazil and help bring down inflation this year to around the 4.5-per-cent centre of its official target.

Still, the bank stressed in Thursday's minutes that "monetary policy should remain vigilant" to ensure that short-term inflation pressures do not spread.

Brazil's IPCA consumer price index rose a higher-than-expected 0.65 per cent in the month through mid-January, highlighting the inflation challenge going forward. The government barely brought full-year inflation in 2011 down to the official target ceiling of 6.5 per cent.

Private economists predict inflation will likely end the year around 5.3 per cent, down from last year but well above the centre of the official target.

The tone of the central bank minutes, which Barclays Capital economist Marcelo Salomon called "uber-dovish," led several economists to raise inflation estimates for this year and next.

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