March 12 (Bloomberg) -- Brazilian policy makers were unanimous in last night’s decision to cut the benchmark interest rate, signaling they’re prepared to reduce borrowing costs to a record low when they meet next month.

The central bank lowered the so-called Selic rate by 1.5 percentage points, the steepest cut in five years, to 11.25 percent.

“Rates will break record lows when the central bank cuts again next month,” Marcelo Carvalho, chief Brazil economist for Morgan Stanley, said in a telephone interview from Sao Paulo. “More monetary easing is in the pipeline.”

The monetary authority, led by central bank President Henrique Meirelles, sped up the pace of rate reductions after record job losses and plunging output forced the government this week to say it will lower its 4 percent growth target. Brazil’s economy may contract in 2009 for the first time in 17 years as commodities and domestic demand plunge, Carvalho said.

The central bank, in a statement accompanying its decision, said it would evaluate the “magnitude and speed” of 2.5 percentage points in cuts since January and their cumulative effect before deciding on its next steps.

The statement was an attempt to temper expectations for another big rate reduction, said Ana Cristina da Costa, chief economist for Bradesco Asset Management.

“Anything is possible at the next meeting,” da Costa said in a phone interview from Sao Paulo. “The economic outlook is very clouded. The central bank doesn’t feel comfortable imagining the size of the next cut.”

Brazil’s Real

Yesterday’s central bank decision won’t have an immediate impact on Brazil’s real, which has declined 23 percent in the past six months, said Alvise Marino, emerging market economist at IDEAglobal in New York. The currency gained 0.3 percent yesterday to 2.3402 per dollar.

“The increase in easing pace will, however, provide long- term support to the real,” he said in a note to clients. “The market has turned to rewarding currencies backed by aggressive monetary policy.”

At the bank’s January meeting, policy makers voted 5-3 to reduce the rate by a full percentage point to 12.75 percent, with dissenters favoring a smaller cut.

The last time Brazil’s central bank cut by 2.5 percentage points in two meetings was at the end of 2003.

Carvalho predicts the lending rate will be lowered to 9.75 percent by mid-year. Yesterday’s rate reduction brings borrowing costs to the record low 11.25 percent that lasted from September 2007 until April 2008.

Shrinking Economy

Following the decision, Banco Santander SA said it would pass along the entire cut to the rate it charges on certain consumer loans.

The national statistics agency this week said Brazil’s gross domestic product contracted 3.6 percent in the fourth quarter from the previous period, the biggest drop since the series started in 1996.

The decline exceeded forecasts from all 31 analysts surveyed by Bloomberg. After the report, Finance Minister Guido Mantega said the government’s 4 percent growth target would be lowered. A new forecast will be released March 20, he said.

Brazil’s economy hasn’t contracted in two straight quarters since the first half of 2003. The economy hasn’t suffered an annual contraction since 1992, when it fell 0.5 percent, according to the national statistics agency.

Economists slashed their economic growth forecast this week. JPMorgan & Chase Co. said yesterday Latin America’s largest economy would contract 1.4 percent this year instead of an earlier forecast of a 0.8 percent expansion. BNP Paribas is expecting a 1.5 percent decline. Carvalho said Morgan Stanley’s call for zero growth was now too optimistic.

‘Technical Recession’

“A technical recession is a very clear possibility,” said Pedro Paulo Silveira, chief economist at Sao Paulo-based Gradual Corretora. “The first rational reaction for policy is interest- rate cuts, which are much more effective for a country used to very high interest rates like ours, rather than any stimulus plan.”

Empresa Brasileira de Aeronautica SA, the world’s fourth- largest aircraft maker, cut 20 percent of its workforce last month after the outlook for sales dropped. Automakers in Brazil have dismissed 7,800 workers since the crisis started, according to Anfavea, the country’s automaker association.

Companies eliminated jobs in January, the first time in at least seven years that positions were reduced in the first month of a year, after cutting a record 655,000 government-registered jobs in December.

“Brazilian companies will keep cutting jobs and output; we haven’t hit rock bottom yet,” said Paulo Mateus, an economist at Barclays Capital Inc. in Sao Paulo. “Brazil’s most effective tool against the economic slowdown is to cut the rates that are restricting growth.”

Slowing Inflation

Brazil’s annual inflation rate slowed to 5.9 percent in February from a three-year high of 6.41 percent in October, the national statistic agency said. Consumer prices rose 0.55 percent in February because of seasonal increases in school tuitions.

“The drop in GDP coupled with slower inflation opened up room for the more aggressive rate cut,” said Silvio Campos Neto, chief economist for Banco Schahin SA.

The central bank targets an annual inflation rate of 4.5 percent, plus or minus two percentage points.

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Joshua Goodman in Rio de Janeiro at jgoodman19@bloomberg.net

Last Updated: March 11, 2009 23:01 EDT