BRASILIA (Reuters) - Brazil’s central bank maintained its pace of interest rate cuts as expected on Wednesday, but signaled policymakers could step up monetary easing in an attempt to pull the economy out of its worst recession ever.

A view of Brazil's Central Bank in Brasilia, Brazil, September 15, 2016. Picture taken September 15, 2016. REUTERS/Adriano Machado

In a unanimous vote, the bank's 9-member monetary policy committee, known as Copom, cut its benchmark Selic rate BRCBMP=ECI by 75 basis points for the second straight time to 12.25 percent - its lowest since March of 2015.

Unions and business groups had called for a cut of 100 basis points to reduce some of the world’s highest borrowing costs, which they say could undermine recovery.

A rapid drop in inflation, which could end the year below the 4.5 percent official target, had strengthened the case for a bolder rate cut after the bank surprised markets by cutting more than expected at its last meeting.

In its decision statement, the bank said a heftier rate cut would hinge on the economy and inflation.

“A possible acceleration of the pace of monetary easing will depend not only on the estimated extension of the cycle, but also on the evolution of economic activity, on the other risk factors, and on inflation forecasts and expectations,” the bank said.

It added that the duration of the easing cycle would depend on the structural interest rate, which is the overall rate of the economy that is neutral to inflation.

The bank lowered the 2017 inflation forecast in its markets scenario to around 4.2 percent from 4.4 percent previously, below the 4.5 percent midpoint of the official target. For 2018, it kept the market scenario forecast at 4.5 percent.

The bank did not release its base scenario forecasts.

BIGGER CUT

Although slightly above expectations, official data on Wednesday showed annual inflation dropped to near 5 percent in mid-February in part due to the steep appreciation of the Brazilian real currency BRBY.

Analysts said further downward surprises in inflation could lead to more aggressive rate cuts.

“The statement was very neutral, but it didn’t say anything that prevents a bigger cut at the bank’s next meeting,” said Raphael Ornellas, economist with Sao Paulo-based Brasil Plural.

Juan Jensen, chief economist of 4E Consultoria, said the bank’s decision would spark a debate on the structural interest rate of the Brazilian economy.

“Nobody knows for sure where that rate stands, but the bank may signal it wants a lower rate to take monetary policy into expansionist territory,” said Jensen, adding that he is considering revising down his 9.5 percent year-end Selic forecast.

Until recently, central bank chief Ilan Goldfajn had signaled policymakers would maintain the current pace of rate cuts to avoid stoking inflation expectations that have fallen to near the target mid-point after years.

Brazil’s recession, the worst in its history, has left millions unemployed and bankrupted hundreds of companies, raising pressure on Goldfajn to lower rates.

Facing a grueling fiscal crisis, President Michel Temer is relying on falling interest rates to exit a recession that threatens to stretch into a third year.

However, the sharp drop in inflation has sparked a debate inside his administration over whether the government’s 2019 inflation target, decided in June, should be set at a lower level. That could slow the pace of monetary easing.

Brazil introduced an inflation rate target in 1999. The current 4.5 percent goal was first adopted for 2005, originally with a tolerance margin of plus or minus 2.5 percentage points. In 2015, the government narrowed the range to plus or minus 1.5 percentage points.