UPDATE 2-Brazil cenbank barely cuts 2016 inflation forecast, signals rate hikes

miércoles 24 de junio de 2015 11:57 GYT

(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.   Continuación...