* Central bank lowers 2013 inflation view to 5.8 pct from 6 pct
* Sees inflation at 5.7 pct in 2014, 5.5 pct in Q3 2015
* Bank director says “a lot of work” left to battle inflation
* 2013 GDP growth forecast cut to 2.5 pct from 2.7 pct
By Alonso Soto
BRASILIA, Sept 30 (Reuters) - Inflation in Brazil will remain stubbornly high well into 2015 even as the economy struggles 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 2013 inflation forecast to 5.8 percent from 6 percent previously. However, it revised its inflation view for 2014 to 5.7 percent from 5.4 percent previously and said it expects inflation at 5.5 percent in the third quarter of 2015.
The bank also revised down its estimate for economic growth to 2.5 percent for this year from a previous 2.7 percent forecast. The bank sees growth keeping that pace until the second quarter of 2014.
The projections for quickening inflation sparked a rally in the Brazilian currency, the real, as well as interest-rate futures as investors increased bets on a longer monetary tightening cycle that would bring more U.S. dollars into the economy.
Central bank director Carlos Hamilton Araujo added to the rally with hints of further rate hikes, saying there was “a lot of work to be done” in monetary policy to battle inflation.
The more downbeat view of the economy highlights the challenges that Brazilian President Dilma Rousseff faces to bring growth back to the heyday of above 4 percent annually that made Latin American’s largest economy an investor favorite. Rousseff is widely expected to run for re-election in 2014 and is leading early voting intention polls.
It also raises the stakes for the central bank, which is trying to regain its inflation-fighting credentials. The bank has steadily raised its benchmark Selic interest rate this year to 9 percent in a bid to contain the surge in consumer prices.
Yields paid on Brazil’s interest-rate futures expiring in January 2015, one of the most traded, jumped 18 basis points to 10.32 percent on Monday, meaning some traders are starting to bet that the bank could extend its monetary tightening cycle into 2014.
Still, many economists doubt the bank will tighten monetary policy much more to bring inflation back to 4.5 percent, the midpoint of the official inflation target range from 2.5 percent to 6.5 percent.
“One thing is clear - the central bank should do more to battle inflation given these projections,” said Flavio Serrano, senior economist with BES Investimento in Sao Paulo. “But we don’t think the bank will do that. We don’t think the bank will raise rates enough to hit the center of the target by 2014.”
Serrano expects the bank to raise the Selic rate by another 50 basis points to 9.50 percent on Oct. 9 and then end the cycle with either a 25- or 50-basis-point increase in November.
Most other private economists agree that the central bank will likely end the cycle soon with rates slightly below 10 percent.
The real firmed 1.35 percent to 2.2261 per dollar after advancing nearly 2 percent earlier in the day. A higher Selic rate tends to attract more dollars from abroad as investors seek higher yields from Brazilian financial assets.
Annual inflation in Brazil has stayed well above the official target since 2010 in what economists say reflects the authorities’ growing tolerance for higher inflation in order to prioritize economic growth.
Araujo later told reporters that the central bank will remain aggressive in its battle against inflation, which remains under pressure due to an expected quickening of prices abroad and a weaker real.
“As the central bank continues to adjust monetary conditions, we believe that inflation will ease in 2014,” Araujo said. “We are working for inflation to ease as quickly as possible.”
He warned that an increase in real wages above gains in productivity adds to inflationary pressures. Brazilians have seen steep salary increases in recent years thanks in part to a government-imposed formula to recalculate the minimum wage every year.
After bringing its benchmark interest rate to record lows last year, the central bank surprised many by raising borrowing costs in April to slow inflation in the hopes of preventing it from derailing a sluggish economic recovery.