UPDATE 4-Brazil central bank leaves door open for rate cuts

* Bank says economic recovery slower than expected
* Bank reiterates inflation risks low in Brazil
* Global economic outlook remains 'fragile'
* High inflation, savings accounts may limit rate cuts

By Alonso Soto
BRASILIA, April 26 (Reuters) - Brazil's central bank said on
Thursday any further monetary easing should be conducted with
care, signaling policymakers may push to lower the benchmark
rate to new all-time lows to bolster a sluggish economic
recovery.
The bank's monetary policy committee on April 18 cut its
benchmark Selic interest rate by an expected 75 basis points to
near-historic lows of 9 percent. It surprised markets with hints
that it could lower rates even further.
In the minutes of this month's meeting, the bank made that
message even clearer, saying it may not be done yet with one of
the world's most aggressive easing cycles.
"The Monetary Policy Committee believes that, given the
cumulative and lagged effects of policy actions implemented so
far, any movement of additional monetary easing should be
conducted sparingly," the bank said in the minutes.
The minutes removed the previous guidance that the Selic
rate was likely to fall to near all-time lows and stay there,
which analysts see as indication that more rate cuts are
dependent on the pace of recovery in Latin America's largest
economy.
"This puts the bank at a wait-and-see mode. It's difficult
to say what they will do; they left the door wide open," said
Italo Lombardi, an economist with Standard Chartered in New
York. "The minutes definitely has a bias of lower rates, but not
much lower than where we are now."
A sharp drop in the yields on Brazilian interest futures after the release of the minutes also signals that
investors believe the bank will keep cutting rates.
At 9 percent, the Selic is 25 basis points above the
lowest-ever Selic rate of 8.75 percent held between early
September 2009 and May 2010. That period encompassed a bout of
negative economic growth in the final quarter of 2009.
The Brazilian economy is again struggling after flirting
with recession last year, prompting central bank chief Alexandre
Tombini to take bold action and trim 350 basis points off the
rate since August.
The central bank has been at the heart of President Dilma
Rousseff's crusade to regain the impressive growth rates that
made Brazil a star in the emerging-market world.
The bank said in the minutes the domestic recovery has been
slower than expected, but sees activity picking up despite a
more fragile global rebound.
Continued credit expansion, high consumer and business
confidence and unemployment near an all-time low should support
the economy, the bank said.
The country's jobless rate rose slightly more than expected
to 6.2 percent in March, but still marked a record low for the
month, government data showed on Thursday.
However, that same tight labor market has raised fears that
high inflation could again be a problem in 2013 if the central
bank pushes for lower rates.
Some analysts held on to their views that the bank will keep
the rate at 9 percent this year as inflation starts to pick up
speed and the recovery strengthens.
"The pipeline of economic indicators is less dovish, making
it harder for the Brazilian central bank to continue cutting
rates," Barclays' economists said in a note to clients.

INFLATION JITTERS
A higher-than-expected inflation reading in the month to
mid-April may signal prices could rise quickly later this year
even amid a mild recovery.
Annual inflation has eased to 5.25 percent to mid-April,
still a steep drop after ending last year at 6.5 percent, right
at the ceiling of the official target.
The central bank said in the minutes that it remains
confident that the slowing global economy will help nudge annual
inflation toward 4.5 percent -- the midpoint of its 2.5 percent
to 6.5 percent target range.
A potential constraint to the depth of the easing cycle is
the worry that investors could drop Selic-linked government
bonds to pour their money in tax-free savings accounts, known as
poupança.
A massive flight from government bonds to savings accounts
is likely to raise the government's financing costs and hit
banks' profits. The poupança, which was created in the 1860s
when Brazil was ruled by a monarch of Portuguese decent, has a
return of 0.5 percent a month plus a variable rate.
Local media and analysts have speculated the government
will move to reduce the returns of savings accounts to allow for
a lower Selic rate. Rousseff said this week that any changes to
the poupança should be examined "very calmly."
Link to central bank minutes: