(Adds central bank official comment, 7th paragraph)
By Alonso Soto and Silvio Cascione
BRASILIA, March 31 (Reuters) - Brazil’s central bank raised its inflation forecast for 2016 and 2017, in a strong indication that policymakers will not yet cut interest rates despite a deepening recession in Latin America’s biggest economy.
In its quarterly inflation report released on Thursday, the bank raised its 2017 inflation forecast to 4.9 percent from 4.8 percent previously. For 2016, the bank raised its forecast to 6.6 percent from 6.2 percent previously.
It sees annual inflation dropping to the 4.5 percent center of the official target only in the first quarter of 2018.
The central bank is under growing pressure from politicians and businessmen to cut some of the world’s highest interest rates to help an economy mired in what could be its worst recession in more than a century.
The growing risk of impeachment of President Dilma Rousseff has fueled market speculation that the leftist leader could make changes in the central bank board to force down its benchmark Selic rate that stands at 14.25 percent. The board is scheduled to meet again on April 27 to decide on rates.
Brazilian interest rate futures <0#2DIJ:> opened higher on Thursday, suggesting traders see a rate cut later than previously expected. Some economists forecast a rate cut as soon as June.
Central bank director Altamir Lopes, a member of the bank’s eight-member board, said past monetary tightening helped produce a “significant” drop in inflation and said policymakers should persevere in the monetary adjustment for disinflation to continue.
In the report, the central bank reiterated that it is not considering monetary easing under current conditions even after acknowledging that the output gap has been more disinflationary than previously expected.
“It (bank), will take the necessary measures to assure it will achieve its inflation targeting goal,” the bank said in the report, which also revised its economic contraction forecast to 3.5 percent in 2016 from 1.9 percent previously.
Brazil’s annual inflation rate fell below 10 percent in mid-March for the first time in five months on lower energy rates and smaller increases in food prices.
The central bank aims to keep inflation at 4.5 percent, the center of the official target that has a tolerance band of two percentage points up and down.
The bank has said it aims to keep inflation below the 6.5 percent ceiling of the target for this year and bring it down to 4.5 percent in 2017. (Reporting by Alonso Soto and Silvio Cascione Editing by W Simon)