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* Central bank cuts 2012 GDP growth view to 2.5 pct from 3.5 pct
* Inflation forecast for 2012 up to 4.7 pct from 4.4 pct
* Central bank says pace of recovery very gradual
By Alonso Soto and Silvio Cascione
BRASILIA, June 28 (Reuters) - The Brazilian central bank sharply cut its economic growth forecast for this year to a meager 2.5 percent, signaling it may keep pushing the limits on record-low interest rates to pull the economy out of its lull.
In its quarterly inflation report, the bank also raised its forecast for 2012 inflation to 4.7 percent from 4.4 percent, but lowered its estimate for next year to 5 percent from 5.2 percent previously.
The downward revision in gross domestic product growth from 3.5 percent previously means Brazil's economy could expand less this year than in 2011, when growth slowed to 2.7 percent. Most independent economists expect growth of closer to 2 percent this year but some bet the economy could slow even further.
"The change in the growth projection reflects in part the fact that the recovery is materializing very gradually," the bank said in the report, adding that activity should accelerate in coming quarters.
The slow pace of recovery in Brazil is putting added pressure on policymakers to take more steps to spur the economy. The central bank has already slashed its benchmark Selic rate to a new all-time low of 8.5 percent, and the government has cut taxes on dozens of consumer products.
That flurry of monetary and fiscal stimulus is again stoking price fears for the coming months even as inflation moves toward the center of the official target range of 4.5 percent plus or minus 2 percentage points. Annual inflation eased to 4.99 percent in May, its lowest since 2010.
The Brazilian government on Thursday maintained the official mid-point target at 4.5 percent for 2014.
Central Bank Director Carlos Hamilton Araujo said later on Thursday that the sharp depreciation of the local currency, the real, was a factor in the decision to raise the inflation forecast this year.
However, that upward revision is unlikely to spur Brazilian central bankers to stop cutting rates for now.
"Everything in the report points to the continuation of the rate-cutting cycle. They will continue to test new lows," said Flavio Serrano, senior economist with BES Investimento. "The forecast suggests inflation will not hit the target, but the government seems to be OK with inflation at around 5 percent."
The bank reiterated in the report that any further rate cuts should be conducted with "parsimony" and warned the global economy will remain weak for some time. Analysts interpret that to mean the central bank will again cut rates by 50 basis points at its next monetary policy meeting on July 11.
Yields on Brazil interest rate futures fell across the board early on Thursday, reflecting market expectations for lower rates.
Private economists expect the Selic to fall to 7.5 percent this year, a weekly central bank poll showed on Monday.
President Dilma Rousseff unveiled a new round of measures on Wednesday aimed at bolstering state spending as the country's decade-long investment boom starts to fade. Her government has announced stimulus measures almost monthly since October, underscoring her preference for a strong state role in the economy.
Brazil and BRICS peers India and China have seen growth in their economies slow sharply since mid-2011 as investor appetite for emerging market assets fades amid fears of another global recession.
Brazil's case may be the most dramatic due to the country's rapid fall from grace.
Brazil's economy grew a stellar 7.5 percent in 2010, its fastest pace in over two decades, but slowed sharply to 2.7 percent last year as the government tried to ease consumer spending to avoid overheating.
Rousseff, a career economist, now sees the slowdown as an opportunity to slash some of the world's highest interest rates and lower credit costs for a booming middle class in the world's No. 6 economy.
The central bank has trimmed 400 basis points off its rate since August, one of the most aggressive easing cycles among emerging economies.
Still, the Brazilian economy remains surprisingly weak.
The economy barely grew in the first quarter from the previous quarter, surprising even some of the most pessimistic forecasters, who had expected a rebound.
Business leaders and market players say that if Rousseff wants to avoid a new era of mediocre growth, the government will need to tackle the infamous "Brazil cost" - a mix of high taxes, high wages and infrastructure bottlenecks.