(Recasts adding Tombini and analyst comments and currency movenment)
By Alonso Soto
BRASILIA, Sept 24 (Reuters) - Brazil’s central bank raised its inflation forecast for next year to well above its official target, but warned markets it has no plans to raise interest rates as it expects a deepening recession to curb price increases.
In its quarterly report released on Thursday, the bank raised its 2016 inflation forecast to 5.3 percent from 4.8 percent previously.
The upward revision is due to rapid depreciation of the real that hit its weakest level ever earlier on Thursday as investors fret about the deepening political and economic crisis. The central bank targets an inflation rate of 4.5 percent, the midpoint of its tolerance range of 2.5 percent to 6.5 percent.
Despite such pressures, central bank chief Alexandre Tombini said in a press briefing the bank will stick to its plan to keep interest rates on hold for some time as it aims for inflation to ease to the target in late 2016.
Tombini also said the bank was ready to use its foreign reserves to limit forex volatility, sparking a rebound of the real that is now trading 1 percent stronger at 4.10 per dollar.
The central bank revised its economic growth forecast to a contraction of 2.7 percent this year and 2.2 percent in four quarters through to the second quarter of 2016.
The recession should ease inflationary pressures in coming years, the bank said.
Some economists warned the bank risks putting more pressure on the real if it does not raise borrowing costs soon.
“If the central bank does not hike in the next meeting, they will see another round of deterioration,” Santander Securities strategist Sandro Sobral said in a note to clients.
The central bank halted its aggressive rate-hiking cycle on Sept. 2, keeping its benchmark Selic rate at 14.25 percent to avoid doing more harm to an economy struggling with its worst recession in 25 years.
In Thursday’s report, the bank said the increase in its 2016 inflation expectation was “small” compared to previous ones and reaffirmed that its goal is to lower inflation to the target in late 2016.
Annual inflation is currently more than the double the 4.5 percent target with consumer prices rising 9.53 percent in the 12 months through August.
The bank also raised its 2015 inflation forecast to 9.5 percent from a previous 9 percent. But it sees annual inflation dropping sharply to 4.0 percent in the third quarter of 2017. (Reporting by Alonso Soto and Silvio Cascione; Editing by W Simon and Chizu Nomiyama)