UPDATE 4-Brazil holds interest rate as economy cools

* Brazil central bank holds Selic rate at 10.75 pct

* Tightening cycle could resume next year

* Lower rates could help presidential candidate Rousseff (Adds analyst's comment)

By Ana Nicolaci da Costa

BRASILIA, Sept 1 (Reuters) - Brazil's central bank on Wednesday held its benchmark interest rate at 10.75 percent, ending a monetary tightening cycle that helped cool a red-hot economy as the country gears up for a presidential election.

Policymakers were expected to keep the so-called Selic rate BRCBMP=ECI at 10.75 percent at the conclusion of a two-day monetary policy meeting after markets close, according to most economists surveyed by Reuters. For more, see: <[ID:nSPG003024]

"While it does not expect the inflation rate registered in recent months to be maintained in the near future, the Copom sees the continued reduction of risks for the inflation outlook that has taken shape since its penultimate meeting," the bank's monetary policy committee, known as Copom, said in a statement.

The committee's statement makes it clear that, without anything new, there will be no more hikes in coming months, said Jose Francisco de Lima Goncalves, chief economist with Banco Fator.

"The statement recognizes that the more recent inflation data are not a jumping off point for inflation expectations, but that there's still a process of lowered risk," he said. "I think it's hard to argue with that.

The central bank has lifted the Selic by 200 basis points since April, when the rate stood at an all-time low of 8.75 percent.

But with the economy cooling from its torrid pace in the first quarter and inflation slowing, analysts see room for the bank to hold rates steady through the end of the year. However, interest rates could start climbing again in 2011.

"To bring inflation back to the center of the target, they'll need to start the tightening process again at the start of the year," said Jankiel Santos, chief economist for BES Investimento in Sao Paulo.

The Selic could end 2011 at 12 percent, he said -- still lower than the 13.75 percent rate as recently as last year, marking a new era for Brazilian interest rates.

Brazil shook off the global economic crisis more quickly than many developed economies, chalking up Chinese-level growth rates in the first quarter that prompted fears of overheating.

As the central bank raised interest rates and the government phased out tax breaks for key industries, the economy cooled and inflation slowed.

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Graphic on interest rates: link.reuters.com/pup68k

Analysis on the election debate and rates: [ID:nN31221925]

Factbox on political risks in Brazil: [ID:nRISKBR]

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Yields on interest rate future contracts <0#DIJ:> have been falling in recent weeks on relatively dovish comments from the central bank after it unexpectedly slowed the pace of tightening at the last meeting.

On one occasion, reports that Central Bank President Henrique Meirelles had spoken of a virtuous cycle of lower inflationary risk sent yields to 11-month lows.

On Wednesday, the yield on the Brazilian interest rate future contract due January 2012 DIJF2, the most widely traded of the day, rose to 11.37 percent from 11.27 percent as strong manufacturing data from the United States and China stoked hopes for a stronger global recovery, which could in turn help Brazilian economic expansion.

Lower interest rates could be good news for presidential frontrunner Dilma Rousseff, the ruling party candidate in the October elections. Rousseff has a double-digit opinion poll lead over opposition contender Jose Serra, a vocal critic of the bank's decision to raise interest rates earlier this year.

Rousseff is backed by the hugely popular President Luiz Inacio Lula da Silva, who has given the central bank autonomy to set interest rates without political interference.

Cooling activity has already crept into inflation data, with consumer prices unexpectedly falling in the month to mid-August and analysts revising down their inflation expectations for 2010 for the second straight week in a weekly central bank survey.

They now expect inflation to end the year at 5.07 percent, near the government target of 4.5 percent, plus or minus two percentage points. (Additional reporting by Luciana Lopez and Silvio Cascione; Editing by Todd Benson)