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PREVIEW-Brazil 2017 inflation to undershoot target range for first time

SAO PAULO, Jan 9 (Reuters) - Brazil's 2017 inflation rate is poised to undershoot the official target range for the first time ever, allowing the central bank to keep interest rates at all-time lows as the economy gathers steam, a Reuters poll showed.

The benchmark IPCA consumer price index likely rose 2.80 percent last year, according to the median of 26 estimates. That would be the lowest annual rate since 1998.

Even the highest forecast put inflation below the bottom end of the government's target range of 4.5 percent plus or minus 1.5 percentage points. A miss would force policymakers to write an open letter explaining their failure, potentially bolstering calls for continued loose monetary policy.

"The central bank can rest assured that keeping interest rates below neutral levels would be warranted," said Carlos Kawall, chief economist at Banco J. Safra and a former head of Brazil's Treasury.

He expects a 25-basis-point cut to the benchmark Selic rate in February to 6.75 percent, where it would remain until the end of 2018.

Interest rate futures, however, suggest a sizeable minority of traders are betting on an additional cut of 25 basis points in March, a scenario that could strengthen should December inflation come in lower than expected.

The report, scheduled for Wednesday at 9:00 a.m. local time (1100 GMT), is likely to show a 0.30 percent rise from the month before, according to the Reuters survey of economists.

A strong agricultural harvest has driven longer and deeper-than-anticipated food deflation throughout the year. An unexpected regulatory decision to cut power tariffs also helped keep inflation at bay.

Even when stripping out one-off effects, inflation is likely to remain muted in coming months as unemployment holds at double digits.

Kawall forecast inflation of 3.9 percent in 2018 when removing food and regulated prices, a closely watched gauge of underlying trends.

Core inflation estimates below the 2018 target suggest a hawkish central bank and government austerity pledges have successfully brought down inflation expectations for this year.

"This allows the central bank to sustain lower interest rates not only because inflation is slow, but also because neutral interest rates are lower," Kawall said.

The neutral interest rate exerts neither downward nor upward pressure on inflation.

Kawall estimated that the neutral rate minus inflation stands at around 5 percent, but it could fall even further if key fiscal measures are approved, such as a bill trimming social security spending. (Reporting by Bruno Federowski; Editing by Meredith Mazzilli)