December 23, 2014 / 11:51 AM / 4 years ago

UPDATE 2-Brazil central bank signals another steep interest rate hike

(Adds comments by the central bank’s director of economic policy)

By Alonso Soto

BRASILIA, Dec 23 (Reuters) - Brazil’s central bank sees inflation remaining above the 4.5 percent center of its official target for the next two years, hinting it could keep the aggressive pace of interest rate hikes to ease price increases in the future.

In its quarterly inflation report released on Tuesday, the bank lowered its 2014 economic growth forecast to 0.2 percent from 0.7 percent in its previous estimate - a long way from its initial forecast for an expansion of 2 percent.

It estimated that the economy would likely grow at an annual rate of 0.6 percent in the third quarter of 2015.

Still, the bank raised its 2015 inflation forecast to 6.1 percent from 5.8 percent previously and sees inflation easing to 5 percent in 2016.

The central bank aims to keep annual inflation at the center of the official range of 2.5 percent and 6.5 percent.

The central bank on Dec. 3 raised its Selic rate by 50 basis points to 11.75 percent, stepping up monetary tightening to battle inflation, but said that any future steps will be taken with “parsimony”.

Since then, central bank officials have sounded more aggressive, reiterating that the bank will not be complacent with high inflation under pressure from a weaker Brazilian real .

“The bank hardened its tone about monetary policy,” said Alessandra Ribeiro, economist and partner with Tendencias in Sao Paulo, said of the inflation report. “It removed the word parsimony and that indicates it could raise rates by 50 basis points in January.”

Carlos Hamilton Araujo, the central bank’s director of economic policy, said later on Tuesday that the bank removed “parsimony” to give a different signal about monetary policy.

Speaking to reporters, Araujo said parsimony was used at the time to hint that policymakers were not going to opt for exaggerated rate increases.

“Parsimony is a code word in our communications and it fulfilled its goal at that moment,” said Araujo, who is one of the eight members of the central bank board.

In the inflation report, the central bank said that it will do whatever is necessary for inflation enter a long period of decline that brings the index to 4.5 percent in 2016.

The central bank is expected to hike rates to 12.50 percent by the end of next year, according to a central bank survey of economists released on Monday.

High public spending and a tight labor market has kept inflation under great pressure since President Dilma Rousseff took office in 2011, averaging 6.08 percent per year. (Additional reporting by Silvio Cascione; Editing by Alison Williams and W Simon)

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