UPDATE 2-Brazil central bank makes smaller rate cut; Lula appointees dissent
(Adds breakdown of vote and economist comment in paragraphs 3-8)
By Marcela Ayres
BRASILIA, May 8 (Reuters) - Brazil's central bank on Wednesday cut interest rates by 25 basis points, delivering a smaller reduction after six straight cuts of twice that size, despite dissent from all four directors appointed by President Luiz Inacio Lula da Silva.
The bank's rate-setting committee, known as Copom, lowered the Selic benchmark interest rate to 10.50% in its first divided decision since it started cutting rates in August 2023.
In a Reuters poll of 39 economists, 22 expected the smaller cut, while 17 forecast another 50-basis-point reduction.
The four Copom members selected by the leftist Lula voted for another 50-basis-point rate cut, including monetary policy director Gabriel Galipolo, a frontrunner to run the bank once Governor Roberto Campos Neto concludes his term in December.
Campos Neto and the four other directors nominated by Lula's predecessor, Jair Bolsonaro, secured a majority with their votes to cut the benchmark rate by 25 basis points.
Policymakers dropped recent guidance about their plans for the next policy meeting, instead stressing that the length and intensity of the easing cycle "will be determined by the firm commitment of reaching the inflation target in the relevant horizon."
Still, the division on the rate-setting committee will spark "inevitable" speculation about a dovish shift in policy once it has a majority of Lula appointees next year, said Gino Olivares, chief economist at Azimut Brasil Wealth Management.
Olivares forecast 25 basis-point reductions at the next policy meetings, saying that the central bank's emphasis on a unanimous view about rising uncertainty indicates that the dissenting directors picked by Lula "will not rock the boat."
Market bets shifted sharply toward a smaller cut last month after Campos Neto warned that policymakers could no longer provide guidance on their next steps due to increasing uncertainties.
Campos Neto based that view largely on hot U.S. inflation data delaying the prospect for the Federal Reserve to start cutting interest rates in the world's largest economy. He also cited the Brazilian government's decision to loosen its 2025 fiscal target, which affected risk premiums.
Before that, the central bank had signaled another 50 basis-point cut in May, although shortening the horizon for its guidance from a previous outlook for 50-basis-point cuts at "upcoming meetings."
The Brazilian central bank was among the first in the world to initiate an easing cycle in August, which brought borrowing costs down from a six-year high of 13.75%.
While the latest inflation figures in Brazil have been lower than expected and long-term U.S. interest rates declined, alleviating pressure on the exchange rate, other sensitive data has clouded the outlook in Brazil.
Market expectations worsened for 2025 inflation, now fully factored into the relevant horizon for the central bank actions, along with forecasts for 2026.
Strong Brazilian labor market data also reinforced caution about impacts on service inflation, which is running higher than the headline print, a longstanding concern for policymakers.
Accelerating inflation in Mexico has reinforced bets that policymakers there will hold their benchmark interest rate at 11% on Thursday after cutting it by 25 basis points in March.
Brazil's 12-month inflation slowed to 3.77% in mid-April. The official inflation target is 3.0% for 2024 and 2025.
In its statement on Wednesday, the central bank raised its inflation projections to 3.8% for this year and 3.3% for the next, from 3.5% and 3.2% previously. (Reporting by Marcela Ayres Editing by Brad Haynes and Leslie Adler)