UPDATE 2-Brazil pauses interest rate hikes despite high inflation

Wed May 28, 2014 8:27pm EDT

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(Recasts with rate decision and bank statement)

By Alonso Soto

BRASILIA May 28 (Reuters) - Brazil left its benchmark interest rate unchanged on Wednesday, pausing one of the world's longest-running tightening cycles to avoid choking its weakening economy despite high inflation.

In a unanimous decision, the central bank's monetary policy committee, known as Copom, kept its Selic rate at 11 percent, breaking a streak of nine consecutive hikes as expected by a majority of analysts and market traders.

Worries that higher rates could hurt an already fragile economy and a slowdown in the pace of price increases has led the central bank to change tactics even though inflation remains close to the 6.5 percent ceiling of the official target.

In its decision statement, the central bank said it decided to leave the rate unchanged "at this moment," signaling it has not closed the door on more rate hikes in the future.

"Evaluating the evolution of the macroeconomic outlook and perspectives for inflation, the Copom decided, unanimously, at this moment, to maintain the Selic rate at 11.00 percent per annum, without bias," the bank said in a statement.

Many economists said the bank needed to continue tightening to anchor high inflation expectations even if it meant more pain to an economy that has been stuck in a rut for the last three years.

Double-digit interest rates along with sagging business confidence and a still subdued global economy has dragged down activity in Brazil, once one of the world's fastest-growing economies.

Brazil likely grew just 0.2 percent in the first quarter from the previous quarter, slowing from a 0.7 percent expansion in the prior reading, according to the median of 27 forecasts in a Reuters poll. The commodities powerhouse is expected to grow just 1.6 percent this year, down from 2.3 percent in 2013. (Reporting by Alonso Soto; Editing by Meredith Mazzilli, W Simon and Lisa Shumaker)

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