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UPDATE 2-Brazilian inflation lowest in a year, fuels expectations of rate cut

Jamie McGeever

(Changes headline, recasts lead, adds quote)

BRASILIA, July 10 (Reuters) - Annual consumer price inflation in Brazil rose at its slowest pace in over a year in June, government statistics agency IBGE said on Wednesday, increasing the likelihood the central bank will lower interest rates later this year.

The annual rate of inflation fell to 3.37% in June from 4.66% in May, suggesting inflation has peaked and is on track to undershoot the central bank's official target this year.

The rate recorded its biggest fall from one month to the next in more than 15 years, although a sharp drop was always likely, given that inflation in June last year rose sharply due to a nationwide truck drivers strike.

Still, it will only fuel expectations of a cut to the central bank's benchmark Selic interest rate.

"The sharp drop in Brazilian inflation ... suggests that policymakers will soon start to ease monetary policy," wrote William Jackson, chief emerging markets economist at Capital Economics, in a client note.

"Barring any major hiccups with the government's pension reform bill, a 25 basis point cut in the Selic rate (to 6.25%) looks likely this month," he said.

Brazil's lower house of Congress is expected to vote on a landmark overhaul to the country's pension system on Wednesday.

June's figure was slightly higher than the 3.33% median forecast in a Reuters poll of economists, but the lowest since the 2.86% rate in May last year. The central bank's target is for consumer price inflation to end this year at 4.25%, and finish next year at 4.00%.

The biggest drivers of the slowdown were food and drink prices, which fell 0.25% on the month, and transportation costs, which fell 0.31%, IBGE said. Communication costs also saw deflation, with prices dipping 0.02% on the month.

The biggest increase was in health and personal care costs, which rose 0.64% on the month, IBGE said.

Overall, the monthly rate of inflation in June slowed to 0.01%, the lowest this year, from 0.13% in May, IBGE said.

The central bank's latest weekly 'FOCUS' survey of financial institutions on Monday showed that, on average, economists see inflation ending this year at 3.80%, and the central bank's benchmark Selic interest rate at 5.50%. That implies 100 basis points of policy loosening from the current record low 6.50%. (Reporting by Jamie McGeever; Editing by Jeffrey Benkoe)