UPDATE 2-Brazil's central bank signals end to year of rate cuts
* Most bank board members favored a "final" rate cut
* Bank gives no hints on how long it will keep rates steady
* Analysts worry low rates could spell higher inflation
BRASILIA/SAO PAULO, Oct 18 (Reuters) - Brazil's central bank signaled on Thursday that a year-long monetary policy easing cycle has come to an end but gave no new hints on how long it will keep interest rates at record lows while an economic recovery takes hold.
The central bank on Oct. 10 cut its benchmark Selic rate for the 10th straight time by 25 basis points to 7.25 percent.
Minutes released Thursday from the monetary policy committee (Copom) said most of the policy-makers saw the 25 basis point cut as the "final" reduction before holding interest rates for a "sufficiently prolonged period of time" to curb inflation.
The bank's committee was split 5 versus 3 in favor of cutting rates.
Most of the committee members saw risks to the recovery due to the global slowdown, which would have disinflationary effects on the domestic economy, the minutes said.
Many analysts predict the Selic will remain at its current record low well into 2013 to help support an economy that is slowly recovering from a year of near zero growth. They believe the bank could opt to renew some limits to credit or macroprudential measures to keep tabs on inflation.
"It is difficult to say how long (it will remain unchanged), but our analysis is for at least until the end of next year, but with the possibility that it could go further," said Silvio Campos Neto, an economist with Tendencias Consultoria in Sao Paulo.
A decline in the yields on medium and long term interest rate future contracts on Thursday also confirms the market is betting on stable rates through at least part of 2013.
Lower interest rates have been one of the main priorities of President Dilma Rousseff who wants to bring back the impressive growth rates that made Brazil a star among emerging market economies over the last decade.
The latest economic data points to a pick up in activity in the third quarter after a flurry of government stimulus measures like targeted tax breaks and billions of reais in cheap loans to jump-start a nearly stagnant economy.
Domestic activity should pick up through the end of the year and into 2013 due to robust domestic demand, strong credit disbursement and recovering consumer and business confidence, the central bank said. The economy is expected to grow only 1.5 percent this year, but rebound to a 4 percent growth rate in 2013, according to a recent central bank poll of analysts.
But many economists worry that the recovery, coupled with a long period of low rates, could ultimately stoke inflation in coming years. At 5.28 percent, annual inflation remains above the center of the official target range of 4.5 percent -- plus or minus 2 percentage points.
INFLATION A WORRY
The central bank reiterated in the minutes that a recent pick up in inflation due to a surge in local and global food prices was temporary.
Still, the three committee members that voted against the last rate cut agreed that eventual demand and cost pressures stemming from the recovery could weigh on inflation.
Inflation is expected to end this and next year at 5.4 percent, which although below the 6.5 percent posted in 2011 remains much higher than that of regional peers like Chile and Mexico. The International Monetary Fund sees inflation in both countries at 3 and 3.5 percent respectively next year.
Brazilian inflation rose above the median of expectations in September to mark its strongest jump for that month since 2003.
Senior government officials have publicly said there is no need for the bank to raise rates next year as a planned energy cost reduction and tax breaks on some industrial products should keep inflation at bay in 2013.
However, the central bank has said it will not hesitate to raise rates next year if inflation becomes a problem.
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