* Central bank slashes rate to 9.75 pct from 10.50 pct
* String of weak economic data likely influenced decision
* Analysts expected 50 bps rate cut, traders saw 75 bps
* Bank directors divided 5 to 2 over rate cut
By Alonso Soto and Tiago Pariz
BRASILIA, March 7 Brazil slashed interest
rates by a larger-than-expected 75 basis points on Wednesday,
stepping up its battle to revive struggling industries that
threaten to derail the recovery of Latin America's largest
In its boldest move since August, when it surprised markets
and began the current round of cuts, the central bank lowered
its benchmark Selic lending rate to 9.75 percent from 10.50
percent in a split decision.
Two of the bank's seven directors wanted to lower the rate
by half a percentage point for the fifth straight meeting.
It was only the second time on record that Brazil has cut
the Selic below 10 percent, taking borrowing costs to their
lowest level in nearly two years.
Directors made the decision hours after data showed
industrial output fell nearly three times more than economists
had expected, the latest indicator to suggest Brazil's boom is
Central bank chief Alexandre Tombini is treading a fine line
by trying to bolster economic growth without rekindling
inflation, which has slowed this year after finishing 2011 at
6.5 percent, the highest year-end level in seven years.
By accelerating the pace of interest rate cuts, President
Dilma Rousseff's administration hopes to shield Brazil's
recovery from a strong local currency that economists and
business leaders say is crippling its industrial base.
"Generally the central bank slows the rhythm (of interest
rate cuts) when it's near the end of a cycle, but now it's
accelerating. We can expect more cuts to the Selic rate," said
Eduardo Velho, chief economist with Prosper Brokerage.
Traders successfully predicted the steeper rate cut. But
most analysts had expected a 50 bps reduction, believing Tombini
would opt for a somehwat more cautious approach to anchor
inflation expectations even as pressure mounted for policymakers
to do more to jumpstart the economy.
"Continuing the process of adjusting monetary conditions,
the Copom decided to lower the Selic rate to 9.75 percent," the
bank said in an unusually short statement accompanying its
Signs of an incipient recovery in Brazil, coupled with a
slew of new government measures to stimulate growth, could again
put pressure on inflation that remains naggingly high.
Faster rate cuts could pressure inflation expectations as
they did in the months after rates reached similar lows in
2009-2010. At that time the government was battling to maintain
growth in the wake of the U.S. banking crisis.
Inflation expectations for 2013 have risen for three
straight weeks, a central bank survey of economists showed.
Official data on Tuesday showed Brazil's economy grew just
2.7 percent in 2011 and barely avoided a recession in the second
half of the year. That was a far cry from 2010, when the economy
grew 7.5 percent, the fastest pace in more than two decades.
Rising global oil prices and lower growth in China,
Brazil's largest trading partner, could further hamper an
economy that is already dealing with high taxes, a tight labor
market and weak infrastructure.
Tombini has warned recently of the risks to the recovery
stemming from a resurgence of foreign capital inflows that
bolstered the value of the real. The currency gained
around 8 percent in the first two months of the year.
"This decision had to do with the connection between
interest rates and foreign exchange and the government's
inclination to help industrial competitiveness by weakening the
currency," said Tony Volpon, head of Americas emerging markets
research at Nomura Securities, of Wednesday's rate cut.
Industries ranging from auto makers to shoe and food
producers have been hit by the strong real, raising their costs
and flooding the local market with cheaper imports from abroad.
MORE CUTS AHEAD
Rousseff has taken measures to try to limit what she calls a
"tsunami" of cheap money from rich nations. Cash has flooded
into emerging market nations from richer ones to take advantage
of higher benchmark rates.
In response, the central bank has stepped up interventions
in the currency market to prevent the real from strengthening
further and undermining competitiveness of local industry.
In theory, lower rates would help limit capital inflows by
reducing the returns of investors seeking higher profits in
emerging markets. But even at 9.75 percent, Brazilian interest
rates would remain among the world's highest.
Benchmark rates in the United States are near zero.
Easing Brazilian inflation is likely to allow for more rate
cuts ahead, but the pace will also depend on the health of the
Inflation slowed to an 11-month low of 6.22 percent in
January. Analysts see annual inflation easing further to 5.84
percent in February.
Tombini had already said the Selic rate could fall to single
digits and signaled the easing cycle may continue further by
saying the economy is growing below potential, which means there
is room for more rate cuts without risking runaway inflation.