UPDATE 3-Brazil's central bank hawkish tone in minutes spurs bets on easing pause

(Updates with market bets for next policy meeting in paragraphs 2-3, comment from economists in paragraphs 8-9)

By Marcela Ayres

BRASILIA, May 14 (Reuters) - Brazil's central bank policymakers concluded at their meeting last week that conditions demanded a more restrictive and cautious stance, minutes showed on Tuesday, prompting traders to increase bets that there will be a pause in easing.

Interest rates futures priced in a 63% likelihood of a pause in the easing cycle in June. Previously, bets were divided but leaned slightly towards an additional 25-basis-point reduction in the benchmark Selic rate. The Brazilian real gained 0.36% by early afternoon.

At the May 7-8 meeting, policymakers cut the benchmark interest rate by 25 basis points to 10.50%. Four of the nine committee members dissented and felt the bank should adhere to the previous guidance for a 50-basis-point reduction, the minutes showed.

Those members considered whether deviating from that guidance would impact the bank's credibility but joined others in assessing that conditions demanded more restrictive policy.

The dissenters reaffirmed a strong commitment to pursuing the 3% inflation target and the necessary terminal interest rate to reach the target, the minutes said. The minutes indicated consensus for the easing cycle, which began in August, to end with the interest rate at a higher level than the members previously anticipated.

According to the minutes, dissenters also emphasized the need for flexibility in decision making in June, allowing the bank to "adequately calibrate the path of the monetary policy instrument" based on the latest economic data.

"Given this more hawkish tone, it seems to us that those that voted to a 25 bp cut last week will be compelled to halt the easing cycle at the next meeting," said J.P. Morgan economists Cassiana Fernandez and Vinicius Moreira in a note to clients.

They now expect the Selic rate to remain at its current level, abandoning the previous forecast of two additional 25-basis-point cuts.

The central bank last week removed any guidance, highlighting a unanimous view about the uncertain global and domestic scenarios, characterized by resilient economic activity and unanchored expectations. That would require greater caution, it said.

Last week's monetary decision was a close split, with all four of President Luiz Inacio Lula da Silva's appointees to the nine-member-committee voting for a larger rate cut.

That led local markets to tumble on a perception that the central bank may be more lenient in combating inflation next year, when Lula's nominees will be in the majority.

Governor Roberto Campos Neto and two other board members appointed by Lula's right-wing predecessor Jair Bolsonaro finish their terms in December.

William Jackson, chief emerging markets economist at Capital Economics, said the minutes should help assuage concerns about a potential dovish shift next year, providing some support to the currency.

Despite the divided decision, all members agreed on the change in the economic outlook and the abandonment of the forward guidance, said Jackson. He still predicted a 25-basis-point cut in June, with Selic ending the year at 9.75%.

According to the minutes, the group led by Campos Neto, which sealed a smaller 25-basis-point reduction following six consecutive cuts twice that size, assessed that the expected scenario for a 50-basis-point cut flagged in March did not materialize.

That happened against a backdrop of inflation expectations drifting away from the target, heightened inflation projections, a more adverse external scenario and stronger-than-expected economic activity.

"They stressed that much more important than the possible reputational cost of not following some guidance, even if conditional, is the risk of loss of credibility about the commitment to fighting inflation and anchoring expectations," said the minutes. (Reporting by Marcela Ayres; editing by Gabriel Araujo, Louise Heavens and Cynthia Osterman)