Brazil cen bank says still vigilant on inflation

SAO PAULO, May 6 (Reuters) - Brazil's central bank will not ease up in the battle against in inflation, even though consumer prices are rising at the slowest pace in years, the bank's president said in an interview published on Sunday.

With annual inflation running at about 3 percent, the bank has come under pressure from some business leaders and politicians to relax monetary policy and cut interest rates faster to give the economy a boost.

But Henrique Meirelles, who has headed the central bank for the last four and a half years, said inflation is still a threat to the Brazilian economy and that consumer prices would rise sharply if the bank relaxed monetary policy.

"Inflation is under control for the simple reason that it is kept under control by the central bank. It's not magic," Meirelles said told Veja, Brazil's most widely read news weekly.

"If the central bank relaxes, inflation will return," it quoted him as saying.

When Meirelles took over at the central bank in 2003, inflation was running at almost 20 percent a year. To rein in prices, the bank hiked its benchmark lending rate to a whopping 26.5 percent.

While the strategy was successful in bringing inflation down to single digits, it also constrained the economy, which made Meirelles and his team a frequent target for government critics.

The central bank began lowering interest rates in September 2005, and the benchmark rate now stands at 12.5 percent -- an all-time low for Brazil but still high when compared to other countries.

With inflation under control and the economy gaining steam, critics say the bank has plenty of room to cut rates more aggressively. Meirelles disagreed.

"There are no absolute truths in this business, but there is one lesson that has proved infallible: when certain critics say the central bank was wrong, it's a sign that it hit the bull's-eye," he said.