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Brazil central bank: Rate cut won't accelerate inflation

By Alonso Soto and Silvio Cascione

BRASILIA (Reuters) - The Brazilian central bank's decision to slash interest rates will help the economy recover without threatening the downward trajectory of inflation toward its target, the bank said in minutes from its last meeting released on Tuesday.

Approval of more austerity reforms in Congress was needed to maintain the disinflationary process that allowed policymakers to reduce the bank's benchmark Selic rate by 75 basis points to 13 percent on Wednesday, the minutes stated.

"This decision would contribute to the stabilization process and subsequent recovery of economic activity, without leading to a deviation from the objective of bringing inflation to the 4.5 percent target in 2017 and 2018," the bank said.

The size of the cut surprised most analysts, raising market expectations that the economy could recover more rapidly from a two-year recession that has left more than 12 million unemployed.

Traders interpreted the minutes as a confirmation that the bank will continue loosening monetary policy aggressively. Yields on Brazil's interest rate futures <0#2DIJ:> dropped across the board on Tuesday, while the real currency <BRL=> strengthened more than 1 percent against the dollar.

The minutes "signal in our opinion that the most likely scenario is a cycle of four rate cuts of 75 basis points followed by two 50-basis-points cuts," economists with Sao Paulo-based Banco Fibra wrote in a research note.

Facing a crippling fiscal crisis, President Michel Temer is expected to rely on rate cuts to breathe new life into the economy, which was once an emerging market powerhouse.

Still, central bank chief Ilan Goldfajn warned later on Wednesday that monetary policy was "not the only game in town" to revive the economy. He said the slower pace of recovery was behind the bank's decision to cut rates, but other government actions were needed to jump-start the economy.

The central bank was able to cut its interest rate, one of the world's highest, because of a sharp slowdown in annual inflation, which dropped from double digits at the start of 2016 to 6.29 percent in December.

Economists have lowered their year-end Selic projection to 9.75 percent from 10.50 percent a month ago, according to a weekly central bank poll published on Monday.

(Reporting by Silvio Cascione and Alonso Soto; Editing by John Stonestreet and Lisa Von Ahn)

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