Jan. 21 (Bloomberg) -- Brazil's central bank unexpectedly kept its benchmark lending rate at 16.5 percent, ending seven months of cuts, after inflation accelerated.

None of the 33 economists surveyed by Bloomberg had forecast the bank would leave the overnight rate unchanged. The median forecast was for the central bank to reduce the rate 0.5 percentage-point to ensure a recovery in South America's biggest economy.

The central bank said in a statement it wants to gauge the effect of reducing the overnight target rate by 10 percentage points since June on economic growth and inflation. Consumer prices in Sao Paulo rose 0.7 percent between mid- December and mid-January, up from 0.4 percent the previous month, according to the University of Sao Paulo Economic Research Foundation.

``If anyone had doubts about what the central bank will pursue, the decision makes things clear: Their main objective will be to meet the inflation target,'' said Mario Mesquita, ABN Amro Bank NV's head Brazil economist in Sao Paulo.

Mesquita, who was the most accurate of two dozen economists surveyed by Bloomberg in 2003, had predicted an 0.5 percentage point cut.

Fighting Inflation

Policy makers are trying to reduce the annual inflation rate to the government's target of 5.5 percent this year from 9.3 percent in 2003. Bank directors voted 8 to 1 to keep the rate unchanged ``with the purpose of preserving recent achievements in the fight against inflation and in the process of recovery of economic activity,'' according to the statement.

``The conservative decision was correct,'' said Roberto Troster, the chief economist of the Brazilian Federation of Banks Association, in an interview in Sao Paulo. It shows the central bank ``has a strong commitment with inflation- targets.'' Troster said he expects the central bank to resume cutting rates and by yearend will cut the target rate 3 percentage points to 13.5 percent.

The central bank has been lowering the benchmark lending rate since June to help bolster growth after the economy contracted in both the second and third quarters last year. The government forecasts the economy grew less than 1 percent in 2003, while a central bank survey of economists last week predicted Brazil's economy probably grew less than 0.1 percent, the slowest pace of growth since 1992.

Manufacturers

Lower rates would help retailers and manufacturers such as by lowering borrowing costs and boosting demand. Jose Luiz Alqueres, chief executive officer of Alstom SA's Brazil unit, said he wants the central bank to accelerate rate cuts to spur demand for the company's power turbines and other products.

Alqueres said in a televised interview with Bloomberg News said Alstom may have to fire 200 workers in the country this year because of a decline in orders.

The central bank's ``was a lamentable decision that frustrated the expectations of the retail industry and generated uncertainty about the future path of interest rates,'' said Guilherme Afif Domingos, president of the Sao Paulo Commercial Association, in a statement sent by e-mail.

At the same time, lower rates hurt banks such as Banco Bradesco SA, the country's biggest non-government bank, by reducing income from government bonds and loans, said analysts such as Carlos Albano of Uniao de Bancos Brasileiros SA.

Bradesco

Albano said the decline in rates has driven Bradesco and other banks to buy rivals and add customers. Bradesco bought Banco Zogbi, a consumer finance company, in November; and HSBC Holdings Plc bought Lloyds TSB Group Plc's Brazilian business, including its consumer finance unit Losango.

The central bank's decision today reflected concern that companies will soon start to boost prices as consumers step up purchases of goods and services. Caramuru Alimentos SA, Brazil's largest grain and cooking oil processor, said it is considering raising prices before June because their costs for raw materials such as soybeans and petrochemicals are climbing.

``It's a direct relationship: they raise prices, we follow,'' said Cesar Borges de Souza, Caramuru's finance director, in a telephone interview from Sao Paulo. ``We can't help it.''

Annual inflation in Brazil has dropped from seven-year high of 17.2 percent in May after President Luiz Inacio Lula da Silva's spending cuts fueled a rebound in the currency that has driven down import prices.

Brazil's currency fell 0.09 percent at 2.84 per dollar at 5:49 p.m. in New York and is up 20 percent against the dollar in the past 12 months.

Last Updated: January 21, 2004 18:04 EST