January 10, 2018 / 12:34 PM / 10 months ago

UPDATE 3-Brazil 2017 inflation tops forecasts, but misses official target

(Adds details on open letter, central bank chief Goldfajn comments)

By Bruno Federowski

SAO PAULO, Jan 10 (Reuters) - Brazil’s 2017 inflation rate topped analysts’ expectations but missed the official target range for the first time, setting the stage for interest rates to remain at all-time lows.

The benchmark IPCA index rose 2.95 percent last year, the lowest annual rate since 1998 and below the government’s target of 4.5 percent, plus or minus 1.5 percentage points, statistics agency IBGE said on Wednesday. BRCPIY=ECI>

The reading came in above even the highest forecast in a Reuters poll of 26 economists as food prices rebounded after seven months of declines. The median estimate in the survey was for a 2.80 percent annual rate.

That figure is a far cry from the rates seen early in 2016, when inflation reached 13-year highs, even as Latin America’s largest economy slipped into its deepest recession in decades.

Despite faster-than-expected gross domestic product growth last year, double-digit unemployment rates and idle capacity among companies kept a lid on price hikes.

In a legally-mandated open letter, the central bank blamed missing the target on food deflation in the wake of a record harvest. Stripping away food prices, the 2017 inflation rate would have been 4.54 percent, the letter said.

The IPCA consumer price index rose 0.44 percent from November, surpassing a median 0.30 percent forecast in the Reuters poll.

In a news conference, central bank chief Ilan Goldfajn said the surprise will not lead the bank to reassess recent communication on monetary policy, as “it is not the time” for that.

The bank acknowledged in its latest quarterly inflation report the risk of underwhelming inflation, along with the risk of disappointment over “reforms and necessary adjustments to the Brazilian economy.”

Interest rate futures indicated most traders expect a 25-basis-point cut to the benchmark Selic rate to 6.75 percent in February, with a sizeable minority betting on an additional reduction in March.

With expectations for 2018 inflation below the midpoint of the official target, the central bank looks set to take its time before raising rates again.

Still, analysts stress that consolidating low interest rates and inflation will depend on efforts to cut government spending and implement structural reforms.

President Michel Temer aims to pass a bill trimming social security spending before a presidential election in October, but much of the budget cuts will fall to his successor. (Reporting by Bruno Federowski; Additional reporting by Mateus Maia and Marcela Ayres in Brasília; Editing by Jeffrey Benkoe and Grant McCool)

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