Central Bank sees higher inflation this year.

BRASILIA, Jan 24 (Reuters) - The Central Bank worsened its inflation outlook for this year by reinforcing the risks to prices in the short term, but maintained that it is working towards "timely" convergence to the target, according to minutes released Thursday from the last meeting of the Monetary Policy Committee (Copom).

This more deteriorated price scenario includes an adjustment of approximately 5 percent in the price of gasoline and a decrease of approximately 11 percent in residential electricity rates this year, according to the document.

The Copom (Monetary Policy Committee) highlighted that domestic demand is expected to remain robust in this and the coming semesters, especially due to household consumption. It also emphasized that the public sector continues to be "expansionary," but noted that the international scenario is limiting aggregate demand.

In this context, he argued that "future monetary policy decisions will be made with a view to ensuring the timely convergence of inflation to the target path." The Copom also indicated that it will maintain the Selic rate—currently at a historic low of 7,25 percent per year—for a "sufficiently prolonged period."

The 2013 inflation projection released by the Copom (Monetary Policy Committee), according to both the reference and market scenarios, has increased and is now above the 4,5 percent target center, as measured by the IPCA (Broad Consumer Price Index). For 2014, the projection is also "slightly above the target center" in both scenarios.

The Copom (Monetary Policy Committee) also failed to mention that inflation would converge to the target "albeit in a non-linear fashion," which fueled assessments that the Central Bank might be viewing inflation in an even worse light.

A key source within the economic team informed Reuters that, even with prices in Brazil still under pressure in January and "perhaps" in February, the central scenario for part of the government regarding price behavior is a "more linear" decline, moving towards the target.

The latest signs of inflation continue to show more pressure. The IPCA-15, the preliminary indicator of the official inflation rate, showed an increase of 0,88 percent in January, above the most pessimistic expectations.

Losing strength?

Last week, the Copom (Monetary Policy Committee) decided, for the second time in a row, to keep the Selic rate at the historic low of 7,25 percent per year and had already reinforced that it will remain so for the next few months.

In the statement, however, the committee had already anticipated the assessment that there had been a worsening of inflation in the short term -- a scenario repeated in the minutes of this Thursday -- raising a yellow flag among economic agents, who increased discussions about possible Selic rate hikes sooner than expected.

In the minutes, however, the Copom (Monetary Policy Committee) reported that the slower recovery in domestic economic activity stems "essentially" from supply constraints. Therefore, this gap cannot be filled by monetary policy actions "which are, by definition, an instrument for controlling demand."

The government has been working hard at the start of this year to show that inflation will lose momentum in the coming months. To that end, President Dilma Rousseff announced last night that the cuts in electricity prices will be even greater and effective immediately.

A government source had told Reuters, prior to this announcement, that the Central Bank calculated that the cut in these tariffs would have a negative impact of 1 percentage point on this year's IPCA (Brazilian consumer price index), more than enough to offset the expected rise in gasoline prices, with a positive impact of 0,3 points on the inflation indicator.

The latest signs of inflation continue to show more pressure. The IPCA-15, the preliminary indicator of the official inflation rate, showed an increase of 0,88 percent in January, above the most pessimistic expectations.

(Reporting by Tiago Pariz)