MercoPress. South Atlantic News Agency

Brazil central bank admits “a lot of work must be done” to bring down inflation

The bank also lowered its estimate for 2013 economic growth to 2.5% from 2.7%

Inflation in Brazil will remain stubbornly high well into 2015 even as the economy struggles to gain steam, the central bank said in its quarterly inflation report. The bank also revised down its estimate for economic growth to 2.5% for this year from a previous 2.7% forecast. The bank sees growth keeping that pace until the second quarter of 2014.

Even when the bank lowered its 2013 inflation forecast to 5.8% from 6%, it revised its inflation view for 2014 to 5.7% from 5.4% and said it expects inflation at 5.5% in the third quarter of 2015.

Central bank director Carlos Hamilton Araujo hinting to further rate hikes, said 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 above 4% annually which made Latam's largest economy an investor favourite. Rousseff is widely expected to run for re-election in 2014 and is leading early voting intention polls.

Still, many economists doubt the bank will tighten monetary policy much more to bring inflation back to 4.5%, the midpoint of the official inflation target range from 2.5% to 6.5%.

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.