UPDATE 1-Brazil's central bank voices concerns over inflation expectations misalignment

(Adds further details from minutes, context)

BRASILIA, Sept 26 (Reuters) -

Brazil's central bank stressed its concern about inflation expectations misaligned with official targets and indicated that while some of its board members pointed out improvements in closely watched services inflation, others remained cautious.

In the minutes of the meeting held between September 19-20, when the bank

cut the benchmark interest rate

by 50 basis points to 12.75%, some members of its rate-setting committee Copom highlighted that the underlying fundamentals for services inflation dynamics were uncertain, given economic activity and labor market resilience.

Policymakers had previously signaled further rate cuts of the same size ahead, tempering market expectations for a faster pace later in the year. The central bank now emphasized a low likelihood of larger reductions, which would require substantial positive surprises in inflation.

It also signaled that part of its board was "particularly concerned" about the possibility of inflation targets becoming unanchored for an extended period, after saying that the divergence from inflation targets remains "a matter of concern."

Market participants weekly surveyed by the central bank project inflation at 3.86% in 2024 and 3.5% in 2025, exceeding the official 3.0% target for both years, which are guiding current monetary policy decisions.

Last week, the central bank worsened its inflation forecasts to 3.5% in 2024 and 3.1% in 2025, attributing, in the minutes, these higher figures to a tighter output gap, rising oil prices, foreign exchange rate depreciation, and lower expected future interest rates by the market.

It also cited ongoing fiscal concerns, global disinflation fears, and the perception that the bank could become more lenient in fighting inflation over time as factors contributing to the divergence in inflation expectations from official targets.

Policymakers said the reduction of expectations would come through "firm conduct" to regain credibility and strengthen the reputation of institutions and economic frameworks, at a time when President Luiz Inacio Lula da Silva's target of eliminating the primary budget deficit next year is viewed with skepticism due to its reliance on booming public revenues. (Reporting by Marcela Ayres; Editing by Steven Grattan)