* Central bank raises 2015 inflation forecast to 7.9 percent
* Analysts expect at least one more rate increase in April (Rewrites throughout with central bank director comments on inflation, analyst on interest rate)
By Alonso Soto and Silvio Cascione
BRASILIA, March 26 (Reuters) - Brazil’s central bank signaled on Thursday it will continue to raise interest rates as it expects inflation to remain too high next year despite a contracting economy.
In its quarterly report, the bank raised its inflation forecast to 7.9 percent in 2015, acknowledging it will surpass the official target range of 2.5 percent to 6.5 percent for the first time since 2003.
The spike in inflation is expected even as the bank sees the economy contracting by 0.5 percent this year, closer to market expectations for a negative growth of 0.83 percent.
Of more concern for policymakers is that, contrary to their own promises, their estimates show inflation will not hit the 4.5 percent center of the target in 2016.
“Although we have seen some progress in the stabilization of inflation expectations for 2016, we still don’t consider that to be enough,” central bank director Luiz Awazu Pereira said in a press briefing on Thursday.
“Monetary policy will remain vigilant to eliminate the second-round effects that we are seeing now,” Awazu said.
A sharp increase in government-controlled prices such as electricity and fuel and a weaker currency pushed inflation to 10-year highs in February.
The surge in inflation is attributed by many to the erratic economic policies of President Dilma Rousseff, which have weighed on activity and eroded investors confidence in the once-booming Brazilian economy.
Awazu said the economic contraction along with a drop in global commodity prices, tighter fiscal policy and higher interest rates should help inflation ease sharply next year.
For 2016, the bank lowered its inflation forecast to 4.9 percent from 5 percent. It sees annual inflation easing further to 4.7 percent in the first quarter of 2017.
Failure to meet the target in 2016 is an indication that the bank plans at least one more rate increase at its April 29 meeting, analysts said.
“You can be sure that the central bank will raise rates again, probably by another 50 basis points,” said Luis Otavio Leal, chief economist at Banco ABC Brasil. “What will happen after that will depend on whether those mitigating factors take effect.”
The central bank has raised its benchmark Selic rate by 175 basis points since October, going in the opposite direction of central banks in most other major economies. (Reporting by Alonso Soto and Silvio Cascione; Editing by Jeffrey Benkoe and Grant McCool)