BRASILIA, Nov 3 (Reuters) - Brazil's central bank could revise its "forward guidance" pledge to keep interest rates low for a long time in the event of fiscal policy altering the country's debt path, even if the government's spending cap rule is kept intact, according to meeting minutes published on Tuesday.
The minutes of the Oct. 27-28 meeting of the rate-setting committee, known as Copom, struck a more hawkish tone than the policy statement, which many economists said had played down the recent spike in inflation and growing concern over the public finances.
But the minutes showed that the challenges the government faces in reining in its record deficit and debt are weighing more heavily in policymakers' thinking. Increasing fiscal risks could help close the door to any further easing.
"The minutes were more hawkish with regard to fiscal risks," said Rafaela Vitoria, chief economist at Banco Inter in Belo Horizonte.
"Most importantly, they were clear that if fiscal adjustment is not maintained we will not have low interest rates," she said.
Brazil's real strengthened sharply in early trading on Tuesday, with the dollar falling more than 1% to 5.67 reais . Interest rate futures fell and rates curves flattened too.
Copom left its benchmark Selic interest rate on hold at a record low 2.00% in October as expected.
The minutes published on Tuesday showed that policymakers think rising fiscal risks are beginning to balance out the fact that inflation expectations and forecasts are well anchored "significantly" below target over the next couple of years.
"The Committee judged that changes in the fiscal policy that affect the public debt trajectory or compromise the fiscal anchor would motivate a reassessment, even if the spending ceiling in nominal terms is still maintained," the minutes said.
"(T)he upward asymmetry in the balance of risks caused by fiscal risks is sufficient to compensate the fact that its inflation projections in the baseline scenario are below the target at the relevant horizon," the minutes said.
The economy still requires "unusually strong" stimulus, uncertainty remains higher than usual, and disinflationary pressures from the recession caused by the COVID-19 pandemic will likely linger longer than previous recessions.
But any space for further rate cuts is "small", and the "majority" of Copom members think rates are already close to the level from which further reductions could trigger asset price instability. (Reporting by Jamie McGeever; Editing by Bernadette Baum, Kirsten Donovan)
