December 21, 2017 / 11:22 AM / 2 years ago

UPDATE 1-Brazil cuts 2017 inflation forecast further below target

(Updates with additional details from report)

By Bruno Federowski

BRASILIA, Dec 21 (Reuters) - The Brazilian central bank on Thursday cut its forecast for inflation further below the official target range, suggesting it may end the year below the goal for the first time ever.

In its quarterly inflation report, the central bank forecast inflation of 2.8 percent this year, down from a prior 2.9 percent estimate. Brazil targets 4.5 percent annual inflation, plus or minus 1.5 percentage points.

The revision could add to calls for additional interest rate cuts early next year, even as austerity measures seen as crucial to curbing public debt hang in the balance.

Price pressures in Brazil have been muted this year as the economy emerged from its deepest recession in decades, with double-digit unemployment rates helping to drag inflation down from over 10 percent early in 2016.

Still, the central bank forecast gross domestic product growth of 1 percent in 2017 and 2.6 percent in 2018, up from previous estimates of 0.7 percent and 2.2 percent, painting a rosier picture for Latin America’s largest economy.

Inflation remained below the bottom end of the official target range for the whole second half of the year, weighed down by falling food prices amid a strong harvest.

The central bank acknowledged that the months-long period of food deflation, as well as slower industrial price hikes, could drive slower-than-expected inflation.

But it also highlighted the risk that disappointment over “reforms and necessary adjustments to the Brazilian economy” could bump up inflation.

That language fell largely in line with recent central bank comments stressing that a bill streamlining the social security system was crucial to maintaining low interest rates.

Lawmakers delayed a key vote on the unpopular pension reform bill to February, putting it close to next year’s presidential and parliamentary elections.

At its last policy meeting, the central bank cut the benchmark Selic rate by 50 basis points to an all-time low of 7 percent. It hinted at a smaller February cut but stressed the need for “caution” at that time.

Interest rate future yields indicate traders expect a final 25 basis-point rate cut in February. (Reporting by Bruno Federowski; Editing by John Stonestreet)

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