(Recasts with comments, market reaction, background)
By Silvio Cascione and Marcela Ayres
BRASILIA, June 22 (Reuters) - Brazil’s central bank on Thursday lowered its inflation forecasts and reiterated that its next policy decisions remained data-dependent, signaling it was still unsure whether to reduce the pace of monetary policy easing in July.
In its quarterly inflation report, the central bank cut its inflation predictions to 3.8 percent for 2017 and 4.5 percent for 2018, from 4.0 percent and 4.6 percent previously.
The bank sees the annual inflation rate falling to 4.3 percent by mid-2019, below its official target of 4.5 percent.
Lower inflation forecasts provide greater room for aggressive interest rate cuts, such as the 100-basis-point reductions made at the bank’s latest two meetings. They may also help policymakers reduce the country’s inflation target next week for the first time in more than a decade, to 4.25 or 4 percent, as government sources have suggested to Reuters.
Brazil is slowly emerging from a two-year recession, and lower interest rates are expected to speed up the recovery by encouraging investments and consumption.
Yields on interest rate futures were slightly down in morning trading as investors pared majority bets on a 75-basis-point rate cut at the bank’s next meeting on July 26.
The benchmark rate is currently at 10.25 percent, down from 14.25 percent in October last year.
The central bank has been signaling since its latest policy decision in May that higher political uncertainty following a corruption investigation into President Michel Temer would probably lead to a reduction in the size of rate cuts.
The bank reiterated that message on Thursday, but added that such an assessment was made considering the information available at its latest meeting on May 31. The bank repeated that the pace of policy easing “will continue to depend” on economic growth, inflation expectations and other risks.
“We have more than a month until the next policy decision,” said Carlos Kawall, chief economist at J. Safra, in São Paulo. “Is it possible that we see reasons for a bigger (rate) cut? Yes. Today, our call is for a 75-basis-point cut.”
The Supreme Court investigation into Temer has eroded congressional support for his austerity agenda and fueled market volatility since May, as investors fear Brazil may not be doing enough to curb public spending and reduce chronically high inflation in the long run. (Editing by W Simon and Bernadette Baum)