UPDATE 2-Brazil cenbank holds rates, opens way for rate cut

Wed Dec 10, 2008 7:30pm EST
(Recasts, adds economist quotes and byline)
By Ana Nicolaci da Costa
BRASILIA, Dec 10 (Reuters) - Brazil's central bank kept interest rates steady on Wednesday for a second meeting in a row but opened the way for a rate cut on mounting signs the Latin American giant is beginning to feel the weight of a global financial crisis.
The bank's monetary policy committee, known as Copom, voted unanimously to keep its Selic rate on hold at 13.75 percent -- its highest level in almost two years.
The decision was widely expected, with 24 out of 25 economists polled by Reuters last week expecting a pause and only one betting on a 25-basis-point rate cut.
The central bank said it considered cutting rates, but opted for a pause because of the uncertain economic climate.
"The majority of the committee members discussed cutting rates already in this meeting, but given that the macroeconomic climate remains surrounded by uncertainty, the Copom decided unanimously to keep the Selic rate at 13.75 percent," the central bank said in an unusually detailed statement.
"The committee will closely monitor the evolution of the inflation outlook to define in a timely fashion the next steps of monetary policy strategy," the statement added.
Roberto Padovani, chief economist at WestLB said: "It's a very clear sign that a rate cut is coming in January."
There is building evidence that Latin America's biggest economy is starting to feel the pinch of a global credit crisis that has dragged major economies into recession.
Recent data showed Brazil's industrial production slumping, car sales plunging and some companies, like mining giant Vale (VALE5.SA: Quote, Profile, Research, Stock Buzz) (RIO.N: Quote, Profile, Research, Stock Buzz), have begun to lay off workers and scale back investment plans.
But the slowdown has also helped ease inflation as retailers slash prices to attract customers, fueling a fierce debate as to whether Brazil's central bank should follow others around the world and lower interest rates to give the economy a boost at a time of global uncertainty.
The benchmark IPCA price index, which the central bank uses as a gauge when setting interest rates, eased unexpectedly in November, rising just 0.36 percent after a 0.45 percent increase in October.
"What probably motivated the (rate cut) discussion were the various signs that activity is losing steam," said Hugo Penteado, chief economist at Banco Real Asset Management.
"(The tone) surprises me a little because we are still worried about the fall of the currency. The statement is a sign that the Selic rate could be cut before previously thought."
In October, Brazil halted a cycle of rate hikes that started in April aimed at curbing inflation.
Markets were closed at the time of the announcement. (Additional Reporting by Aluisio Alves and Daniela Machado in Sao Paulo; Editing by Phil Berlowitz)