- Economic policy director Mario Mesquita steps down
- Foreign affairs director Araujo to replace Mesquita
- Bank president Meirelles to decide future by Thursday (Adds Meirelles comments, updates rate futures)

By Ana Nicolaci da Costa

BRASILIA, March 31 (Reuters) - The director of economic policy at Brazil's central bank stepped down on Wednesday, kicking off a shuffle of the bank's board that could also include its president, Henrique Meirelles.

Mario Mesquita, one of the strongest advocates of the central bank's inflation-targeting regime, left for personal reasons, the bank said in a statement. His departure had been rumored for months and was widely expected.

Yields on Brazilian interest-rate futures <0#DIJ:> barely budged on the news, with most short-term contracts edging lower and longer-term contracts creeping slightly higher.

Mesquita will be replaced by Carlos Hamilton Araujo, the head of the bank's international affairs department. A seasoned central bank official, Araujo is not expected to usher in any significant changes to monetary policy in Latin America's largest economy.

I don't think Mesquita's exit will have a big impact on the conduct of monetary policy, said Bernardo Wjuniski, an analyst at Tendencias consultancy in Sao Paulo. From what we know about Hamilton, he seems to be on the same line as Mesquita.

Mesquita's departure comes as Meirelles' future at the bank is also in doubt. Meirelles, the longest-serving central bank governor in Brazilian history, said on Wednesday he will decide by Thursday whether to step down to run for political office in October elections. [ID:nSAQ002401]

My decision will be out by tomorrow at the latest, without a doubt, Meirelles told reporters after giving a spirited defense of his tenure in a speech at a ceremony commemorating the central bank's 45-year anniversary.

His departure would likely fuel speculation that the central bank could become more vulnerable to political pressure to keep interest rates low in an election year.

On Tuesday, Meirelles said President Luiz Inacio Lula da Silva had asked him to stay in his post until the end of the year. Later, at a dinner with the top brass of his political party, the PMDB, he hinted he was now more inclined to stay at the bank, sources present at the gathering told Reuters.

Meirelles, 64, is weighing a run for the Senate or whether to vie for the vice presidency on the ticket of Dilma Rousseff, Lula's chief of staff and the likely presidential candidate for the ruling Workers' Party.

INFLATION GAINING STEAM

The shake-up at the central bank comes at a time when strong economic growth is driving up consumer prices, prompting the bank to raise its 2010 inflation forecast on Wednesday to 5.2 percent from 4.6 percent. [ID:nN31258163]

That would be above the center of the bank's 2010 inflation target of 4.5 percent, plus or minus 2 percentage points.

The resurgence of inflation means the central bank will probably have to raise interest rates in April for the first time in almost two years. In the minutes from its last monetary policy meeting on March 17, the bank signaled that a rate hike is needed to keep consumer prices in check. [ID:nN25217888]

If Meirelles does step down, most analysts expect his replacement to be Alexandre Tombini, currently the bank's director of banking regulation.

Tombini, a 46-year-old economist who previously worked at the International Monetary Fund, would not be expected to stray far from the policies of Meirelles, who brought interest rates to an all-time low while keeping a lid on inflation.

A former Wall Street banker, Meirelles has won praise for helping steer Brazil through the global financial crisis by slashing interest rates and bank reserve requirements to spur lending and offset an economic downturn.

This was a trial by fire, and Brazil clearly emerged stronger from the crisis, Meirelles said in his speech.

On his watch, Brazil also won a long-sought investment grade credit rating from the top three ratings agencies and experienced its greatest burst of economic growth in three decades, cementing Meirelles' status as the linchpin of Lula's economic policy. (Additional reporting by Natuza Nery and Fernando Exman in Brasilia and Luciana Lopez in Sao Paulo; Writing by Todd Benson; Editing by James Dalgleish and Leslie Adler)

Inflation