UPDATE 3-Brazil central bank raises inflation forecast, signals rate hikes
(Adds central bank comments, market reaction)
By Alonso Soto and Silvio Cascione
BRASILIA, March 27 (Reuters) - Brazil's central bank raised its 2014 inflation forecast sharply on Thursday and said it sees the economy growing at a moderate pace, signaling it may prolong its cycle of interest-rate hikes to battle naggingly high inflation in an election year.
The central bank increased its 2014 inflation forecast to 6.1 percent from its previous estimate of 5.6 percent as a severe drought in southern Brazil hurt crops and raised food prices.
In its quarterly inflation report, the bank also raised its estimate for inflation in 2015 to 5.5 percent from 5.4 percent, highlighting stubbornly high prices that have worried investors for the last three years.
Both estimates are well above the center of the bank's official inflation target: 4.5 percent, plus or minus two percentage points.
"Our outlook does not envisage inflation slowing toward the target midpoint," Carlos Hamilton Araujo, the central bank's economic policy director, told a news conference.
High inflation could hurt President Dilma Rousseff's re-election chances in the October general election. Her approval ratings have dropped sharply from November, according to a poll on Thursday.
The gloomier inflation outlook signals that policymakers are not yet ready to halt a year-long monetary tightening cycle even if it means further slowing Latin America's economy during an election year. Continuación...