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EMERGING MARKETS-Brazil rate futures slip as deflation stokes rate-cut bets

SAO PAULO, July 7 (Reuters) - Yields on short-term Brazilian interest rate futures fell on Friday after monthly consumer prices declined for the first time in 11 years, bolstering the case for a sharp rate cut this month. Prices as measured by the benchmark IPCA index fell 0.23 percent in June, the sharpest drop since August 1998. The annual inflation rate fell to 3.00 percent, at the bottom end of the central bank's target band of 4.5 percent plus or minus 1.5 percentage point. A weaker-than-expected economic recovery has weighed on Brazilian inflation and allowed the central bank to cut the benchmark Selic rate from its highest level in eight years. The bank has been signaling since its last policy meeting that it could reduce the pace of rate cuts to 75 basis points per meeting, from the current 100 basis points, because of growing political uncertainty. Those bets lost some steam after the IPCA release. Rate-future yields indicated traders saw a 70 percent chance of a 100 basis-point cut to 9.25 percent at the central bank's July meeting, with a 30 percent chance of a slower 75 basis-point reduction. Bets were evenly split on Thursday. The Brazilian real strengthened 0.3 percent, in line with Latin American currencies such as Mexico's and Colombia's pesos. Demand for emerging market assets rose after a report showed stubbornly sluggish U.S. wage growth in June despite stronger-than-expected jobs growth. The report was the latest in a batch of mixed economic indicators that have left traders skeptical over the Federal Reserve's plan to increase rates once more this year and three times next year. A slower pace of rate hikes would support the allure of emerging markets, which offer higher yields. Still, the Chilean peso slipped 0.1 percent, tracking a decline in prices of copper, a key export.

Key Latin American stock indexes and currencies at 1445 GMT:

Stock indexes daily % YTD % Latest change change MSCI Emerging Markets 1002.74 -0.34 16.69 MSCI LatAm 2542.48 0.53 8.05 Brazil Bovespa 62547.58 0.12 3.85 Mexico S&P/BVM IPC 49798.88 -0.43 9.11 Chile IPSA 4833.63 0.03 16.43 Chile IGPA 24189.42 0.05 16.66 Argentina MerVal 22094.57 -0.58 30.60 Colombia IGBC 10886.76 -1.14 7.49 Venezuela IBC 123864.70 0.09 290.68 Currencies daily % YTD % change change

Latest

Brazil real 3.2898 0.25 -1.23 Mexico peso 18.1560 0.51 14.25 Chile peso 666.4 -0.14 0.65 Colombia peso 3089.93 0.16 -2.86 Peru sol 3.249 0.12 5.08 Argentina peso (interbank) 16.9700 0.77 -6.45 Argentina peso (parallel) 17.16 0.52 -1.98

(Reporting by Bruno Federowski; Editing by Meredith Mazzilli)