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By Alonso Soto
BRASILIA, Jan 20 (Reuters) - Brazil's central bank kept interest rates on hold on Wednesday as it bet the worst recession in decades would temper double-digit inflation, but the surprise move fueled concern over political interference in policy.
In a split vote, the bank's 8-member monetary policy board, known as Copom, decided to maintain its benchmark Selic rate at 14.25 percent for the fourth straight time. Six board members supported keeping rates on hold while two wanted a 50-basis-point increase.
The decision came after central bank chief Alexandre Tombini on Tuesday unexpectedly backed away from his insistence that higher rates were needed to curb inflation running at a 12-year high of more than 10 percent.
Tombini said policy makers had to take into account the International Monetary Fund's "significant" cuts to Brazil's growth outlook announced on Tuesday. The Fund said the economy would shrink 3.5 percent this year, versus an earlier forecast for a 1 percent contraction.
In its decision statement, the bank highlighted growing uncertainties in the global economy as the main reason for staying on par.
"Considering the macroeconomic outlook and the perspectives for inflation and the actual balance of risks, and considering the increase of domestic and primarily, external, uncertainties, Copom decided to hold the Selic rate at 14.25 percent," the bank said.
President Dilma Rousseff's Workers' Party, business groups and unions called on the bank not to raise rates to give the economy time to recover from a recession that has added 1.5 million people to the unemployment register over the past year.
Officials in her administration have voiced concern that more rate hikes would hinder plans to revive the economy as renewed fears of a slowdown in China and falling commodity prices threaten to drag the recession into 2017.
After signaling a 50-basis-point hike was a real option to curb naggingly high inflation, Tombini on Tuesday said the deepening recession was going to be considered in its rate decision.
Keeping rates steady was seen by many analysts as proof the central bank bowed to political pressure to avoid more harm to an economy expected to shrink nearly 8 percent between 2015 and 2016.
"This decision apparently has the fingerprints of the presidential palace... who is deciding on rates; the president or the central bank board?" said Juan Jensen, a partner with Sao Paulo-based consultancy 4E. "This is a bad decision that hurts the credibility of the central bank a lot."
Rousseff denies interfering in the central bank, but hinted last week she saw no need to raise rates at this moment. Although it has operational autonomy, the Brazilian central bank is not fully independent and remains under the wing of the finance ministry.
Most analysts agreed the bank erred with its erratic communication, but some believed policymakers were right to keep rates on hold.
"The way they communicated was unfortunate," said Carlos Kawall, chief economist with Banco Safra. "But they tried not to catch markets radically by surprise."
Kawall expected the bank to keep rates on hold at its next meeting given little sign global uncertainties are close to ending.
The central bank has raised rates by 700 basis points since 2013, but has had scant success in stemming price rises. Annual inflation surged to 10.67 percent in December, more than double the official target of 4.5 percent, and expectations for this year and next continue to rise as the real currency weakens.
Still, many economists believe the bank needs to resume its aggressive rate hikes to anchor inflation expectations that have failed to subside despite the deepening recession and continue to erode investors' confidence in the once-booming economy.
The specter of more political turbulence as Congress prepares to vote on Rousseff's impeachment later this year is likely to continue to hurt an economy sinking into its worst recession since at least 1990. (Additional reporting by Silvio Cascione, Anthony Boadle and Marcela Ayres; Editing by Chizu Nomiyama and Andrew Hay)