UPDATE 3-Brazil ends year-long easing cycle, signals steady rate ahead
* Central bank as expected holds Selic rate at 7.25 percent * Bank hints will keep rate at record lows in 2013 * High inflation outweighs worries over slow-paced recovery By Alonso Soto BRASILIA, Nov 28 (Reuters) - Brazil ended a year of aggressive interest rate cuts on Wednesday, leaving its benchmark rate unchanged at a record low to try to keep a lid on inflation, despite doubts about an uneven economic recovery. The decision by the bank's rate-setting committee to hold the rate at 7.25 percent was unanimous, showing the solid conviction of policymakers to pause the easing cycle after ten straight cuts that trimmed 525 basis points off the Selic rate. All 60 analysts polled by Reuters expected the central bank to leave the rate unchanged. An overwhelming majority of market traders had also predicted a pause with only 6 percent betting on another 25 basis-point cut, according to Thomson Reuters data. A barrage of government stimulus measures and steep interest rate cuts have started to slowly pull the economy out of near stagnation. The moves have also stoked fears of higher inflation in coming years in a country scarred by a history of runaway prices. The central bank repeated exactly the same language from its last decision statement, saying that monetary conditions should remain stable for a "sufficiently prolonged period of time" to curb inflation. Low interest rates have been one of the main priorities of President Dilma Rousseff as she struggles to bring back the impressive growth that made Brazil a Wall Street darling in the past decade. Under the leadership of Alexandre Tombini the central bank has undertaken one of the most aggressive easing cycles among major economies. He has vowed to hike rates to control inflation if needed. Analysts doubt that could happen any time soon. "The guidance provided by the bank continues to be one very similar to that of the U.S. Federal Reserve in that this is our low rate boundary and we are going to stay here for the foreseeable future," said Enrique Alvarez, head of Latin America research for IDEAglobal. "It doesn't seem that the bank is going to move from that position unless conditions change very significantly." A majority of analysts polled by Reuters last week forecast the benchmark rate will stay at 7.25 percent during 2013. The bank has acknowledged that low rates could keep inflation above the center of the official target range of 4.5 percent - plus or minus two percentage points - for the next couple of years. The bank says, however, that price increases will not pierce the ceiling of 6.5 percent. The central bank has said structural changes to the Brazilian economy allow for lower interest rates without necessarily stoking inflation. Inflation quickened to 5.64 percent in the month to mid-November and is expected to end the year at 5.4 percent.INVESTMENT PROBLEMS However, an uneven recovery and a fragile global economy could raise pressure on Brazilian policymakers to inject more stimulus into the economy. Rousseff has already hinted that the country's currency, the Brazilian real, could depreciate further to revive what has been the weakest leg of the economy: manufacturing. A weaker currency helps manufacturers battle foreign competition, but also raises inflationary pressures at home. Brazil's economy will likely grow just 1.5 percent this year despite billions of dollars in tax breaks and cheap loans released by the Rousseff administration. The central bank's aggressive actions have helped lift the economy, but may not be enough to rekindle growth above 4 percent per year. Private economists are starting to lower their 2013 growth estimates to a shade below 4 percent as the country's historically low investment levels fail to react to the cocktail of stimulus. Analysts at Morgan Stanley and Deutsche Bank warn that the Brazilian economy could be headed for years of lackluster growth as the government fails to bolster public and private investment. Morgan Stanley even predicts the Brazilian economy will grow a meager 2.8 percent next year. Growing government intervention in key sectors of the economy is also hurting investment, some analysts say. The government's push for electricity companies to cut power rates in exchange for the renewal of their concessions has more than halved the stock price of top utility Centrais Eletricas Brasileiras SA in a matter of a few days. Investment probably shrank for the fifth quarter in a row in the third quarter, according to forecasts by analysts polled by Reuters. The economy is expected to have expanded 1.2 percent in the third quarter versus the previous quarter. Anemic investment, high production costs and lack of skilled labor are blamed for stunting growth in Brazil as consumers start to reach their debt limits after a credit boom. Investment equals about 19 percent of Brazil's gross domestic products, well below the 45 percent and 35 percent in BRICS' peers China and India respectively.
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