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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 central bank aims to keep inflation at the 4.5 percent, the
center of the official target range of between 2.5 and 6.5
percent.
The reversal of a decline in inflation expectations is expected
to force the central bank to hike its benchmark Selic rate <BRCBMP=ECI>,
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 central bank's board meets next on Jan. 20 to decide on
interest rates.
The bank reiterated in the report that it take all measures
needed 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, senior economist
with Haitong in Sao Paulo.
Interest rate futures were barely changed after the report as
trade was thin ahead of year-end holidays. Market bets of a rate
hike in January had grown rapidly since the last central bank
policy meeting, when two of eight members of the committee voted
for a steep rate increase.
The bank halted an aggressive cycle in September after inflation
expectations dropped.
Expectations started to climb again due to a weakening real
currency, 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 for 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 Alison Williams and W
Simon)
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