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UPDATE 1-Brazil sees steady decline in inflation, sets 2022 target at 3.5%

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BRASILIA, June 27 (Reuters) - Brazil's top economic policy body on Thursday set its inflation target for 2022 at 3.5% with a tolerance margin of 1.5 percentage points on either side, reflecting a gradual and steady decline in expected inflation over the coming years.

The National Monetary Council (CMN) kept its targets for this year, next year and 2021 at 4.25%, 4.00%, and 3.75%, respectively, all also with the 1.5 percentage point margin of error.

Earlier on Thursday, the central bank's Quarterly Inflation Report showed that in the bank's base-case forecast, with constant foreign exchange and interest rates, inflation out to 2021 will likely come in below these targets and not top 4.0%.

In a press conference following the announcement of the CMN's initial target for 2022, Economy Ministry officials said a lower inflation target does not imply that interest rates will have to rise in order ensure the target is met.

"You do not need to do this," economic policy secretary Adolfo Sachsida told reporters. "It's important to have a low inflation target because that is what anchors inflation expectations."

Inflation in Brazil is expected to continue slowing in the coming months in large part because economic growth is so weak. The economy contracted in the first quarter, and on Thursday the central bank slashed its 2019 growth forecast to 0.8% from 2.0%.

Weak consumer demand and business investment, high unemployment and a huge degree of slack across the economy are all contributing to softening inflationary pressures.

The central bank's weekly 'FOCUS' survey of around 100 financial institutions shows that economists' average inflation forecast for 2021 and 2022 stands at 3.75%. (Reporting by Mateus Maia Writing by Jamie McGeever; Editing by Lisa Shumaker and James Dalgleish)