(Adds comment from central bank director 4th and 5th paragraphs)
By Alonso Soto
BRASILIA, Dec 23 (Reuters) - Brazil’s central bank raised its inflation forecast for next year to near the ceiling of the official target range, signaling it could resume interest rate hikes to tame a surge in price expectations despite a deepening recession.
In its quarterly inflation report released on Wednesday, the bank raised its 2016 inflation forecast to 6.2 percent from 5.3 percent previously. However, the bank sees annual inflation dropping to 4.8 percent in 2017.
The bank aims to keep inflation at 4.5 percent, the center of the official target range of between 2.5 and 6.5 percent.
Central bank board member Altamir Lopes vowed to comply with the bank’s mission to lower inflation to target.
“The bank has the determination, autonomy and instruments to fulfill its strategy,” Lopes told journalists. “Those instruments will be used when necessary.”
The reversal of a decline in inflation expectations is adding pressure on the bank to hike its benchmark Selic rate , already one of the world’s highest at 14.25 percent, despite the rapid fall of the once-booming economy into its worst recession in 25 years.
The bank’s board next meets on Jan. 20 to decide on rates.
The bank reiterated in the report that it will take all measures to bring double-digit inflation to within the range next year and then to the center of the target in 2017. Annual inflation in November was 10.48 percent.
“There are a lot of uncertainties about the economy and the central bank is likely to opt for a preventive hike to anchor inflation expectations,” said Flavio Serrano, economist with Haitong, a Sao Paulo-based bank.
Interest rate futures barely changed after the report as trade was thin ahead of year-end holidays. Market bets of a rate hike in January have grown rapidly since a central bank meeting in November when two of eight members of the policy committee voted for a steep rate increase, but rates were not changed.
The bank halted an aggressive cycle of rate hikes in September after inflation expectations dropped.
Expectations started to climb again due to weakness in Brazil’s currency, the real, persistently high government-controlled prices and deteriorating fiscal results, the central bank said in the report.
The bank pointed to uncertainties related to fiscal policies as a key factor keeping inflation naggingly high. It said policymakers will remain “especially vigilant” to curb short-term inflationary pressures.
Last week, President Dilma Rousseff replaced fiscal conservative Joaquim Levy with a leftist economist as finance minister, triggering a sell-off in markets as investors interpreted the change as a sign of laxer fiscal discipline. (Reporting by Alonso Soto; Editing by W Simon and James Dalgleish)