UPDATE 2-Brazil central bank raises inflation view, cuts GDP forecast
* Inflation forecast up to 6 percent in 2013, 5.4 percent in 2014
* Price outlook may prompt bank to speed up rate increases
* GDP down to 2.7 percent from previous forecast of 3.1 percent
BRASILIA/SAO PAULO, June 27 (Reuters) - Brazil's central bank raised its inflation forecasts for 2013 and 2014, signaling policymakers could accelerate the pace of interest rate increases in coming months to bring down persistent price pressures.
In its quarterly inflation report released on Thursday, the bank raised its 2013 inflation forecast to 6.0 percent from 5.7 percent.
That is above the bank's own informal goal for the year to bring inflation below the 5.84 percent posted last year, and topped private estimates in a weekly central bank survey.
"These numbers tell you that they should accelerate the pace of rate hikes. But I still have doubts on whether they will actually do it," said Jankiel Santos, chief economist with Espirito Santo Investment Bank in Sao Paulo. "Given the exchange rate we could see even higher inflation ahead."
The central bank surprised investors by stepping up the pace of tightening with a 50-basis-points rate increase at its last meeting on May 29. The bank, which decides again on rates on July 10, is expected by many in the market to raise its benchmark Selic rate by 75 basis points to 8.75 percent.
However, a sluggish economy has raised the stakes for central bank chief Alexandre Tombini who is under pressure to curb inflation without hurting a fragile recovery.
The bank revised its estimate for economic growth to 2.7 percent this year from 3.1 percent previously. Despite the drop, the bank's forecast still looks optimistic for most private economists, whose median forecast in the bank's weekly survey estimates growth this year of 2.46 percent.
The widespread nature of price increases has kept inflation persistently high, the bank said in the report, warning again that 12-month inflation has an upward trend in the short-term and the outlook for prices is "unfavorable."
"Monetary policy must remain vigilant in order to minimize risks of high levels of inflation," the bank said, repeating the same language used in the minutes from its last rate-setting meeting.
The central bank calculated that there is a 29 percent chance of annual inflation ending the year above the 6.5 percent ceiling of its official target. The deterioration of inflation expectations is a "relevant risk" for price dynamics by itself, the bank added.
EXCHANGE RATE PRESSURES
A sharp depreciation of the Brazilian real over the last month could accelerate inflation further by making imported goods more expensive. The real is trading at its weakest levels in four year.
Nonetheless, the bank said in the report the exchange rate pass-through has decreased over the last decade and the ongoing rate-rising cycle tends to soften the impact of a weaker real over domestic prices.
Brazil has also called on its peers at the BRICS group - Russia, China, India and South Africa - to work together to fight the appreciation of the U.S. dollar abroad.
A freeze of public transportation fares in major cities following a rash of street protests of the bad quality of public services could help offset the impact of more expensive imports, some economists said.
In the report, the bank increased its inflation view for 2014 to 5.4 percent from 5.3 percent previously, well above the center of the official target of 4.5 percent - plus or minus two percentage points.
However, the bank acknowledged that a pick up in activity should increase tax revenue and improve the government's fiscal results, which remain expansionist or negative for inflation.
President Dilma Rousseff's government has stepped up spending and offered billions of dollars in tax cuts to revive an economy that is likely to post for 2013, a third year of frustrating growth. Last year the Brazilian economy grew 0.9 percent.