UPDATE 2-Brazil officials expect 2013 inflation to stay high

Thu Feb 21, 2013 3:58pm EST

* Central bank director says price convergence "unrealistic"

* Finance minister says inflation to end 2013 at about 5.5 percent

* Both see local currency more stable this year

By Alonso Soto and Luciana Otoni

BRASILIA, Feb 21 (Reuters) - The Brazilian government expects inflation to remain above the center of the official target range in 2013, reaffirming expectations that policymakers could lift interest rates from record lows later this year.

Central bank director Carlos Hamilton Araujo said on Tuesday that expectations that consumer prices would converge to the center of the target are "unrealistic," signaling the bank could revise its 2013 inflation estimate of 4.8 percent. The official target range is 4.5 percent plus or minus two percentage points.

Finance Minister Guido Mantega later highlighted market projections that the IPCA consumer price index should rise 5.5 percent in 2013 and reiterated that the government expects inflation to end the year below the 5.84 percent rate posted in 2012.

"The inflation situation is under control," Mantega said on a conference call with reporters and analysts.

The government of President Dilma Rousseff has signaled it is more concerned with rising prices this year even as the economy continues to disappoint with a slower-than-expected recovery.

That has put the central bank in a difficult spot as its tries to stimulate the economy with record-low rates at the same time it struggles to tame rising inflation expectations.

Brazil's inflation accelerated at the fastest monthly rate in nearly eight years in January, edging dangerously close to the ceiling of the target and raising alarm bells in a country that was scarred by hyperinflation in the 1980s and 1990s.

Central bank chief Alexandre Tombini has warned that the bank is ready to lift interest rates to control inflation even if the economy falters. However, he also hinted that any future rate hikes will be mild and could take time.

The bank ended its monetary easing cycle in October after trimming its Selic rate by 525 basis points to a record low of 7.25 percent in a bid to revive a struggling economy.

Yields on interest rate future contracts in Brazil fell on Thursday due to a gloomier global economic outlook, but still price in a rate hike as soon as April. Yields on the future contract due in Jan. 2014 fell to 7.67 percent on Thursday, compared with 7.69 percent at Wednesday's close.

Both Mantega and Araujo agreed that inflationary pressures are easing and expect trailing 12-month inflation to cool down later this year.

They also agree that a more stable exchange rate will not add inflationary pressures this year. A steep depreciation of the real pushed inflation higher in 2012.

Mantega said he saw no need to take more action in the currency exchange market as the real has stabilized in recent months.

Senior officials told Reuters that higher inflation could be more difficult to battle this year and next as the economy picks up steam following a raft of government stimulus measures. Rousseff also plans to run for re-election next year, and is likely to increase government spending in the runup to the vote.

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