BRASILIA (Reuters) - Brazil will probably keep raising interest rates at least through May as inflation threatens to breach the central bank's target during the upcoming presidential election campaign, a Reuters poll showed on Friday.
All 62 economists polled by Reuters expect Brazil to raise its benchmark Selic lending rate for a ninth straight time, by 25 basis points to 11.00 percent, at its April 1-2 meeting.
The Selic rate is currently at 10.75 percent.
Next week's rate increase will be followed by another 25-basis-point hike in May, according to 30 of 54 economists polled.
The central bank will probably pause its hiking cycle thereafter until January, but many analysts do not rule out further increases if inflation continues to worsen, the poll showed.
The numbers suggest a longer series of hikes than expected a month ago, when the central bank slowed the pace of rate increases to 25 bps from 50 bps and seemed ready to wrap up one of the world's most aggressive tightening cycles.
Since then, a severe drought has raised food prices and created uncertainty over a potential increase in energy costs later this year. Annual inflation is likely to reach 6.6 percent in September, out of the central bank's target range of 4.5 percent plus or minus two percentage points, according to the poll.
"We suspect the central bank would like to bring the hiking cycle to a close sooner rather than later, if it could. Unfortunately, it can't," wrote Marcelo Carvalho, head of Latin America economic research at BNP Paribas.
High prices have been a major headache for Brazilian policymakers, denting support for President Dilma Rousseff as she seeks another 4-year term in the October election.
It has also eroded the central bank's credibility with some investors, especially after the rate-setting committee led by Alexandre Tombini slashed interest rates to record lows in 2011 and 2012, despite a very tight labor market.
ONE SHOCK AFTER ANOTHER
Prospects mounted for a longer series of rate moves on Thursday after the central bank raised its own 2014 inflation forecast to 6.1 percent from 5.6 percent.
The bank acknowledged a temporary shock in food prices and noted that annual inflation is not likely to ease toward the center of the target over the next two years.
"The bank was wrong when it eased the rate increases. That's what its' own forecasting model is telling us," said Alex Agostini, chief economist at Austin Rating, in Sao Paulo.
A disconnect between government-regulated and freely determined prices makes the central bank's task even more challenging. Brazil's government has scant room to keep curbing a rise in the cost of gasoline, energy and bus fares, analysts say, which means interest rates could go even higher to offset the impact of these costs over the rest of the economy.
For now, most economists still agree with the central bank and Finance Minister Guido Mantega that inflation will ease a bit before year-end to close 2014 within the target range.
But four economists in the poll forecast policymakers will miss their target also at year-end. The highest estimate, by Banco Original do Agronegocio, sees inflation at 7.0 percent by the end of the year.
"The bank's view that the current inflation rise is temporary is very risky as it might not be the case. If so, the strategy to raise rates by 25 point per meeting will not stabilize inflation," said Marcelo Cypriano, an economist with Banco Original do Agronegocio.
The poll also reiterated a majority view that Brazil's efforts to shore up its public finances and achieve a 99 billion reais surplus before interest payments this year will fail. The median of 30 forecasts in the poll projected Brazil's primary surplus at 1.5 percent of GDP this year, compared to the 1.9 percent government goal.
Brazil's economy is expected to grow 1.8 percent this year and 2.0 percent in 2015, according to the poll.
(Editing by Bernadette Baum)