Brazil central bank sees inflation high despite weak growth


* Central bank lowers 2013 inflation view to 5.8 pct from 6pct

* Sees inflation at 5.7 pct in 2014, 5.5 pct in Q3 2015

* Bank director says "a lot of work" left to battleinflation

* 2013 GDP growth forecast cut to 2.5 pct from 2.7 pct

By Alonso Soto

BRASILIA, Sept 30 (Reuters) - Inflation in Brazil willremain stubbornly high well into 2015 even as the economystruggles to gain steam, the central bank said on Monday,raising market bets for higher borrowing costs in the future.

In its quarterly inflation report, the bank lowered its 2013inflation forecast to 5.8 percent from 6 percent previously.However, it revised its inflation view for 2014 to 5.7 percentfrom 5.4 percent previously and said it expects inflation at 5.5percent in the third quarter of 2015.

The bank also revised down its estimate for economic growthto 2.5 percent for this year from a previous 2.7 percentforecast. The bank sees growth keeping that pace until thesecond quarter of 2014.

The projections for quickening inflation sparked a rally inthe Brazilian currency, the real, as well asinterest-rate futures as investors increased bets on alonger monetary tightening cycle that would bring more U.S.dollars into the economy.

Central bank director Carlos Hamilton Araujo added to therally with hints of further rate hikes, saying there was "a lotof work to be done" in monetary policy to battle inflation.

The more downbeat view of the economy highlights thechallenges that Brazilian President Dilma Rousseff faces tobring growth back to the heyday of above 4 percent annually thatmade Latin American's largest economy an investor favorite.Rousseff is widely expected to run for re-election in 2014 andis leading early voting intention polls.

It also raises the stakes for the central bank, which istrying to regain its inflation-fighting credentials. The bankhas steadily raised its benchmark Selic interest rate this yearto 9 percent in a bid to contain the surge in consumer prices.


Yields paid on Brazil's interest-rate futures expiring inJanuary 2015, one of the most traded, jumped 18 basispoints to 10.32 percent on Monday, meaning some traders arestarting to bet that the bank could extend its monetarytightening cycle into 2014.

Still, many economists doubt the bank will tighten monetarypolicy much more to bring inflation back to 4.5 percent, themidpoint of the official inflation target range from 2.5 percentto 6.5 percent.

"One thing is clear - the central bank should do more tobattle inflation given these projections," said Flavio Serrano,senior economist with BES Investimento in Sao Paulo. "But wedon't think the bank will do that. We don't think the bank willraise rates enough to hit the center of the target by 2014."

Serrano expects the bank to raise the Selic rate by another50 basis points to 9.50 percent on Oct. 9 and then end the cyclewith either a 25- or 50-basis-point increase in November.

Most other private economists agree that the central bankwill likely end the cycle soon with rates slightly below 10percent.

The real firmed 1.35 percent to 2.2261 per dollar afteradvancing nearly 2 percent earlier in the day. A higher Selicrate tends to attract more dollars from abroad as investors seekhigher yields from Brazilian financial assets.


Annual inflation in Brazil has stayed well above theofficial target since 2010 in what economists say reflects theauthorities' growing tolerance for higher inflation in order toprioritize economic growth.

Araujo later told reporters that the central bank willremain aggressive in its battle against inflation, which remainsunder pressure due to an expected quickening of prices abroadand a weaker real.

"As the central bank continues to adjust monetaryconditions, we believe that inflation will ease in 2014," Araujosaid. "We are working for inflation to ease as quickly aspossible."

He warned that an increase in real wages above gains inproductivity adds to inflationary pressures. Brazilians haveseen steep salary increases in recent years thanks in part to agovernment-imposed formula to recalculate the minimum wage everyyear.

After bringing its benchmark interest rate to record lowslast year, the central bank surprised many by raising borrowingcosts in April to slow inflation in the hopes of preventing itfrom derailing a sluggish economic recovery.

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