(Adds central bank director comments, report details and context)
By Alonso Soto and Silvio Cascione
BRASILIA, June 24 (Reuters) - Brazil’s central bank barely cut its inflation forecast for next year despite signs of a prolonged economic slump, signaling it could charge ahead with one of the world’s boldest rate-hiking campaigns to anchor price expectations.
In its quarterly report released on Wednesday, the bank lowered its 2016 inflation forecast to 4.8 percent from 4.9 percent previously. It sees annual inflation converging to the 4.5 percent center of the official target in the second quarter of 2017.
The bank said that although inflation is converging to the target in the mid-to-long term, there remains a “relevant” gap between its inflation forecast for late 2016 and the midpoint of the target.
Despite fears higher borrowing costs could worsen an expected recession, the central bank has warned it could keep raising rates to make good on its promise to bring inflation back to 4.5 percent in late 2016.
“The bank is signaling that there is more space for action because it still has problems to anchor inflation expectations,” said Cristian Maggio, head of emerging markets research for TD Securities. “It’s a hard game, and the bank is not winning the game of inflation yet.”
To anchor inflation expectations and regain its credibility the central bank has raised rates by a staggering 275 basis points since October. At 13.75 percent, Brazilian interest rates tower over those in emerging market peers like Mexico and Turkey.
A weaker Brazilian real and rising government-controlled prices have kept inflation at over 11-year highs despite the aggressive monetary tightening. The bank raised its 2015 inflation forecast to 9 percent from 7.9 percent previously.
Central bank director Luiz Awazu Pereira acknowledged that inflation has remained persistently high despite the tightening and warned authorities are not thinking of changing strategy just yet.
“We need to persevere with the current fiscal and monetary policies,” Awazu told reporters. He declined to answer whether authorities were considering narrowing the two percentage point inflation target tolerance band.
For 16 years, the bank’s quarterly inflation reports have always predicted inflation at a lower level than what actually materializes, according to data compiled by BNP Paribas.
The bank expects an economic contraction of 1.1 percent in 2015 from a drop of 0.5 percent in the previous report. The market expects negative growth of 1.45 percent, according to a weekly central bank poll of economists. (Reporting by Alonso Soto and Silvio Cascione; Editing by W Simon and Meredith Mazzilli)