June 18 (Bloomberg) -- Brazil’s central bank said room for further interest rate cuts has diminished, cementing expectations policy makers will pause after reducing borrowing costs for a fifth straight time next month.

“Despite a residual margin for an easing process, monetary policy must maintain a cautious stance, with the aim of ensuring that inflation converges to target,” the central bank’s board said in the minutes of the June 9-10 policy meeting published today. “The committee agreed that any additional monetary easing must be implemented in a more parsimonious manner.”

The bank has cut the benchmark rate by at least a point at each of its four meetings in 2009 from 13.75 percent at year-end 2008 in a bid to revive growth. Last week, policy makers cut the so-called Selic rate by one percentage point to a record 9.25 percent. Two of the bank’s eight board members favored a smaller 0.75-point cut, citing the delayed effect of lower interest rates on demand and inflation.

After slipping into recession from October through March, Latin America’s biggest economy is rebounding, policy makers said. “Incipient” signs of a recovery coupled with the need to gauge the effect of this year’s rate cuts will lead the bank to be more cautious, said Silvio Campos Neto at Banco Schahin SA.

“They clearly signaled rate cuts are about to end,” Neto, the bank’s chief economist, said in a phone interview from Sao Paulo.

Gap, Pause

Still, slower inflation, kept in check by slack demand and the output gap, provides the leeway for lower interest rates, the bank said. The bank forecasts that annual inflation will remain below the 4.5 percent target in 2009 and 2010.

Neto expects policy makers to cut the rate to 8.75 percent in July, before pausing at their next meeting in September.

Brazil’s economy slipped into its first recession since 2003 after companies cut back production to adjust for the first global recession since World War II.

The economy shrank 0.8 percent in the first quarter from the previous three months, after a record 3.6 percent contraction in the last quarter of 2008.

Brazilian Finance Minister Guido Mantega said today in Sao Paulo that the economy still needs fiscal and monetary stimulus to boost growth to 4 percent in 2010 and 5 percent in 2011.

Apart from lowering the rate to a record, the government cut taxes for consumer goods, injected about $100 billion in money and currency markets and pledged to keep public investment untouched amid falling tax revenue, in a bid to avert recession.

In the overnight interest-rates futures market, the yield on the contract for January 2010 delivery, the most-actively traded on the BM&F commodity and futures exchange, fell three basis points to 8.86 percent at 11:03 a.m. New York time.

To contact the reporters on this story: Andre Soliani in Brasilia at at soliani@bloomberg.net; Katia Cortes in Brasilia at at kcortes@bloomberg.net

Last Updated: June 18, 2009 11:27 EDT