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UPDATE 2-Brazil March inflation at highest for the month in 11 years

(Adds comments, market reaction, reference to Mexico inflation) BRASILIA, April 9 (Reuters) - Brazil's rate of inflation in March picked up at the quickest pace in 11 years for that month, challenging the central bank's plan to stop raising interest rates soon and complicating President Dilma Rousseff's chances of re-election. Brazil's benchmark IPCA consumer price index jumped 0.92 percent in March from February, exceeding all 37 forecasts in a Reuters poll. It was the steepest increase for the month since 2003, statistics agency IBGE said on Wednesday. In the 12 months through March, consumer prices rose 6.15 percent, inching closer to the central bank's target ceiling of 6.5 percent. Food prices increased 1.92 percent from February as irregular rainfall in southern Brazil early this year hurt crops. Prices of basic staples such as tomatoes, potatoes and beans spiked more than 10 percent in March from February. Fuel costs also rose sharply, with ethanol biofuel jumping 4.07 percent from February. Brazil's inflation is quickening right when the central bank has signaled it may end a year-long campaign of interest rate increases. The bank raised its benchmark Selic rate for a ninth straight time last week to 11 percent, and said it will monitor the economic situation to decide whether to raise rates again next month. "With inflation probably nearing the target ceiling in May, it will be very hard for the central bank not to raise interest rates at least once more," wrote economists with local research firm Rosenberg & Associados in a note. Yields on interest rate futures <0#2DIJ:> rose as traders added bets on future rate increases by the central bank. Inflation is expected to breach the central bank's target ceiling in coming months, according to a recent Reuters poll, and some estimates show it is unlikely to ease below 6 percent over the next 21 months, denting consumer confidence and keeping pressure on politicians. The IBGE numbers continued to show widespread price pressures. Services prices rose 9.09 percent on an annual basis, up from 8.18 percent in the prior month as salaries continue to increase on a tight labor market. And the so-called diffusion index, a measure of the proportion of goods and services with price increases in the month, rose to 71 percent in March from 64.3 in February, according to calculations by Sao Paulo-based Banco Fator. What could still tilt the balance in favor of stable interest rates in May is the possibility that the shock in food prices is only temporary and a stronger real, said Rodrigo Melo, chief economist at asset management firm Icatu Vanguarda. "It was an ugly number. But I think it will not have much of an influence over the next central bank's decision. Until then, we'll see inflation data for April and for early May."

STRONGER CURRENCY Higher inflation also probably means the central bank will not try to curb a recent currency rally, said Enestor dos Santos, an economist with BBVA in Madrid. Brazilian authorities have long complained that a stronger real makes local companies less competitive, but it also lowers the prices of imports, which could help tame inflation. Stubbornly high inflation was one of the main reasons for a recent drop in Rousseff's approval ratings. While she still maintains a comfortable lead in polls on the October election, a recent survey showed more Brazilians want a change in government policies, and twice as many Brazilians think Rousseff's predecessor and mentor, Luiz InĂ¡cio Lula da Silva, is more qualified than her to carry out changes.

Brazil's price outlook contrasts with Mexico's, where inflation fell below the central bank's 4 percent limit according to data released on Wednesday. "This adds to the reasons to expect Mexico to outperform Brazil this year," wrote Neil Shearing and David Rees, emerging market economists with Capital Economics, in London.

Below is the result for each price category:

March February - Food and beverages 1.92 0.56 - Housing 0.33 0.77 - Household articles 0.38 1.07 - Apparel 0.31 -0.40 - Transport 1.38 -0.05 - Health and personal care 0.43 0.74 - Personal expenses 0.79 0.69 - Education 0.53 5.97 - Communication -1.26 0.14 - IPCA 0.92 0.69

(Additional reporting by Camila Moreira; Editing by Bernadette Baum and Jeffrey Benkoe)