UPDATE 2-Brazil central bank divided over bigger rate cuts
(Adds exchange rate gains, economist comment)
SAO PAULO, Brazil, April 26 (Reuters) - Brazil's central bank said slowing inflation could allow for deeper interest rate cuts of up to 50 basis points instead of 25 basis points, though it still cautioned faster economic expansion may rekindle inflation.
In minutes released Thursday from its rate-setting meeting last week, the central bank also said the majority of its directors would like to keep with the smaller cuts until there are clearer signs that inflation won't accelerate.
The central bank cut its benchmark lending rate BRCBMP=ECI to an all-time low of 12.5 percent from 12.75 percent last week.
The bank's policy-makers voted four to three for the quarter-percentage-point cut, which extended Brazil's longest-ever monetary easing cycle that started in September 2005. Three directors wanted a 50-basis-point cut.
The dissenting central bankers argued that gains in Brazil's currency, the real BRBY, have made it cheaper to buy imported products, helping to stem inflationary pressures.
The real gained 5.1 percent against the dollar in 2007 and is trading near its strongest level in six years.
"The minutes inserted a new element to be looked at, which is the exchange rate," said Zeina Latif, chief Brazil economist at ABN AMRO in Sao Paulo. "If we monitored inflation and economic activity before, now we also have to monitor the exchange rate. The currency may help ease some of the concerns over higher activity and the effect in prices."
CAUTIOUS STANCE
Central bank officials said they are waiting to see the full effect of rate cuts of the past 19 months on the economy, which is starting to show signs of warming and could remain vulnerable to inflation.
The bank repeated a phrase of caution used in minutes from several past rate-setting meetings, saying that the "loosening of monetary policy demands to be conducted with parsimony."
Last week's rate decision was made while the bank is undergoing a shift in its board, with two directors stepping down since March. The dissenting votes led many analysts to believe the central bank could resume bigger interest rate reductions at its next meeting in June.
In 2006, the bank cut the Selic by 0.75 percentage point at its January, March and April meetings but pared the size of the cuts to half a point in May, July, August, October and November. Policy-makers then trimmed the size of rate cuts to a quarter-point in January of 2007, a pace that has been kept since then.
Policy-makers, especially Afonso Bevilaqua and Rodrigo Azevedo, the two directors who left the bank, have been widely criticized for being too conservative as Brazil's prices rise at the slowest pace in almost eight years.
Brazil's benchmark IPCA inflation index rose 3 percent in the 12 months through mid-April, well below the central bank's target of 4.5 percent for 2007 and on track for the smallest increase since 1998. Continued...
