• Policy makers have kept 14.25% rate for 5 straight meetings
  • Two members of the 8-person board voted for half-point hike

Brazil’s central bank played it safe and kept the benchmark interest rate unchanged for a fifth straight meeting, as the deepest recession in decades has yet to tame double-digit inflation.

Policy makers, led by President Alexandre Tombini, held the key rate at a nine-year high of 14.25 percent on Wednesday, matching the median forecast of analysts surveyed by Bloomberg. Two members of the eight-person central bank board, Tony Volpon and Sidnei Correa Marques, voted for a hike to 14.75 percent.

Their dissent didn’t come as a surprise, considering the two policy makers have been voting for a 50 basis-point increase since the November meeting, according to Andre Perfeito, chief economist at brokerage Gradual Investimentos. The only change to the wording from the previous communique was that the central bank no longer considers uncertainties to be increasing.

"When those two more hawkish members of the board start voting to hold rates, we’ll probably have cuts in the following meeting," said Perfeito, who expects borrowing costs to start falling in October.

January Surprise

The central bank did offer up a surprise at its last meeting on Jan. 19-20, when it ignored economist and trader forecasts for an increase by keeping rates steady. Policy makers had adopted a uniformly hawkish tone in December and most of January, only to switch course the day the gathering started by highlighting their concern about the severity of Brazil’s recession.

The about-face sent swap rates plunging, as traders rolled back bets on increases this year and even started pricing in possible cuts. Policy makers denied accusations they were giving into political pressures to protect the economy, and in recent days have stepped up their public commentary to play down speculation they will relax monetary policy to revive growth.

The central bank reiterated that message in Wednesday’s decision, by giving no indication it’s ready to start cutting interest rates, said Carlos Kawall, chief economist at Banco Safra.

"Some in the market were expecting a unanimous decision so they could look for a reduction in April," he said. "Today the central bank closed the door on that theory."

GDP Report

Brazil’s recession is likely to become the big story Thursday, as the government is expected to publish data on gross domestic product for the last three months of 2015 that will show the fourth consecutive quarterly contraction. GDP will shrink 3.2 percent this year after last year’s decline, marking Brazil’s most protracted downturn in over a century, according to analysts surveyed by Bloomberg.

The slump hasn’t yet contained inflation, which accelerated the most in more than 12 years at the start of 2016 to 10.7 percent. While that’s more than double the official target of 4.5 percent, policy makers expect inflation to slow this year and next.

"With the economy performing as it is, there is a disinflationary force at play," Tombini said late last month. "That’s why we decided like we did on monetary policy in January. We will see this starting to impact annual inflation rates in February."

Analysts agree that inflation will start easing, dropping by more than 3 percentage points this year and another 1.5 points in 2017, according to a weekly survey published by the central bank. Their median forecast is for policy makers to start cutting its key rate next year, though some banks such as Itau Unibanco Holding SA and Barclays Plc expect reductions to start in the second half of 2016.

"By then, inflation should have decreased in annual terms, and incoming data will likely reinforce the marked deterioration of the labor market," Bruno Rovai, an economist at Barclays, wrote in a note to investors Wednesday night.

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