FILE PHOTO: A drone view shows the central bank's headquarters in Brasilia, Brazil, December 26, 2024. REUTERS/Ueslei Marcelino/File Photo

By Marcela Ayres

BRASILIA (Reuters) - Brazil's central bank held interest rates steady on Wednesday for a second straight policy meeting and signaled it would keep them unchanged for a long time, dropping language that referred to the pause as an "interruption" of its rate-hiking cycle.

Still, policymakers kept a reference to possible hikes, suggesting that borrowing costs in Latin America's largest economy could rise further if needed.

The bank's monetary policy committee, known as Copom, decided unanimously to keep the benchmark Selic rate at 15%, its highest level since July 2006, as forecast by all 41 economists surveyed by Reuters last week.

"The Committee will remain vigilant, evaluating whether maintaining the interest rate at its current level for a very prolonged period will be enough to ensure the convergence of inflation to the target," it said in its policy statement.

In July, the central bank halted an aggressive tightening cycle that had added 450 basis points to the benchmark rate since September 2024 and stressed that the bank would not hesitate to resume hikes if necessary - wording maintained in Wednesday's statement.

However, policymakers dropped a previous line referring to the "continuation of the interruption" of rate increases, which had underscored uncertainty over whether holding rates steady at this level would be enough to bring inflation to the 3% annual target.

The modest tweaks suggest policymakers are sticking to their flight plan, with small nuances reflecting a marginal improvement in their inflation outlook, as the bank's projections for consumer prices improved only for this year.

"The prospect of an interest rate cut in 2025 is moving further out," Inter's chief economist Rafaela Vitoria said, noting that the central bank maintained a "quite hawkish tone," leaving little room for short-term rate cuts despite recent improvements in the external environment and exchange rate.

The caution came even as market expectations for inflation have moderated on longer horizons where they had been stuck for months, a welcome development for the central bank, which had long stressed concerns about market forecasts deviating persistently from the inflation target.

Brazil's currency has strengthened since the bank's last meeting in July, easing price pressures on imported goods. The Brazilian real has gained more than 13% against the U.S. dollar so far this year.

Many analysts see that trend supporting cooling inflation in the months ahead, especially after the U.S. Federal Reserve cut rates on Wednesday and signaled more reductions this year, widening the interest-rate differential and boosting the appeal of Brazilian assets for yield-seeking investors.

Even so, Brazil's central bank held its 12-month inflation forecast on the relevant horizon for policy, now the first quarter of 2027, at 3.4%.

XP chief economist Caio Megale said markets had anticipated at least a marginal improvement on that front.

"The central bank is clearly leaving the possibility of monetary policy flexibility for the first quarter of next year, rather than the near term," he said.

The inflation forecast for this year was revised down slightly to 4.8% from 4.9%, while the 2026 projection was kept unchanged at 3.6%.

Policymakers said Brazil's economic growth is moderating as anticipated, but the labor market remains resilient.

(Reporting by Marcela Ayres; Editing by Brad Haynes and Leslie Adler)