(Adds context and inflation data details)
By Alonso Soto
BRASILIA, Nov 25 (Reuters) - Brazil’s central bank kept interest rates on hold for the third straight meeting on Wednesday in a split vote that shows policymakers are uneasy with galloping inflation despite a worsening recession and might raise rates early in 2016.
The bank’s monetary policy committee, known as Copom, voted 6-2 to maintain its benchmark interest rate at 14.25 percent, its highest in nine years and well above that of other major economies like Mexico and India. Two of the 8-member Copom voted to raise the Selic to 14.75 percent while the rest voted for no change.
The decision to leave rates steady eases pressure on President Dilma Rousseff as she tries to defuse a political crisis that threatens her plans to plug a widening fiscal deficit and regain investors’ confidence.
However, the unusual split decision is the strongest indication yet that the central bank could resume tightening if inflationary pressures linger.
In another telling sign, the bank removed from its statement a previous reference to the need to keep rates on hold for some time to bring inflation back to the official 4.5 percent target.
“In our view this laconic statement with a split decision to hold rates steady signals a high probability of a new tightening cycle at the start of next year,” said Tatiana Pinheiro, economist with Santander Brasil.
The central bank had until recently signaled that it may hold rates steady for some time in hopes that the country’s worst recession in 25 years drags down prices.
However, a weaker Brazilian real and Rousseff’s inability to reduce the fiscal deficit amid political upheaval are making the central bank’s job even more difficult.
Even with the economy in free fall inflation has continued to accelerate, piercing 10 percent in the 12 months to mid-November for the first time in 12 years due an increase in fuel and food prices.
The surprise arrest of Rousseff’s leader in the Senate Delcidio do Amaral on Wednesday for allegedly obstructing a massive corruption investigation could further complicate her efforts to pass an unpopular austerity package.
Many lawmakers from Rousseff’s alliance are blocking the approval of tax hikes and spending cuts that they say will only deepen a recession that could extend into 2016.
Economists expect the economy to contract 3.15 percent and 2.01 percent in 2015 and 2016 respectively, according to the latest central bank weekly poll.
Even with the economy in free fall, inflation shows no sign of easing. The bank abandoned its goal to bring inflation back to the center of the official target range in late 2016 as inflation expectations rose again after a brief drop. The official target ranges from 2.5 percent to 4.5 percent.
Additional reporting by Silvio Cascione; Writing by Alonso Soto; Editing by Lisa Shumaker and Andrew Hay