Brazil’s economy will enter a “dis-inflationary” period, the central bank said, signaling it will keep interest rates unchanged even as it forecasts above-target inflation for at least two years.

Inflation will end 2014 at 6.4 percent, if policy makers keep the benchmark Selic rate at 11 percent, according to the quarterly inflation report published today. That compares with a 6.1 percent estimated in the March report. Policy makers also said the economy will expand 1.6 percent this year, from a previous estimate of 2 percent.

“The committee considers that output gap measurements are tending to become dis-inflationary,” the bank said in its report.

Policy makers in the largest emerging market after China are struggling to tame above-target inflation and rekindle slow economic growth that have helped erode support for President Dilma Rousseff ahead of Oct. 5 elections.

The report’s focus on dis-inflation and slower growth, while forecasting above-target consumer price increases, suggests policy makers have for now abandoned the center of the target range, said Jose Goncalves, chief economist at Banco Fator SA.

“It confirms an outlook of having to live with high, persistent inflation,” Goncalves said by phone from Sao Paulo. “They’re saying we don’t intend to increase the Selic again.”

Inflation Outlook

Inflation will exceed the 6.5 percent upper limit of the inflation target in the third quarter of this year and remain at 5.1 percent in two years, according to the reference scenario in the bank’s report.

Swap rates on the contract due in January 2015 rose 1 basis point, or 0.01 percentage point, to 11.4 percent at 10:51 a.m. local time. The real weakened by 0.16 percent to 2.2113 per U.S. dollar.

Policy makers reiterated that the impact of the world’s longest interest rate tightening cycle, interrupted last month, hasn’t yet fully materialized.

The central bank board this week extended for six months a program to support the real, helping to prevent the price of imports from rising. It last month halted key rate increases to study the impact of a yearlong tightening cycle.

Central bankers on May 28 held borrowing costs at 11 percent after increasing them by 375 basis points, or 3.75 percentage points, during the previous nine meetings. The Selic is more than twice as high as any other target lending rate among major rate-setting nations in Latin America, according to data compiled by Bloomberg.

Picking Up

Annual inflation in mid-June accelerated to 6.41 percent from 6.31 percent the month prior, the fastest in a year. Risks to consumer price increases include inflation dispersion and expectations, as well as uncertainty over government-controlled prices on goods and services such as gasoline, transport and utilities, the bank said.

“The risk that inflation surpasses the top of the target range this year is very high,” Carlos Kawall, chief economist at Banco J. Safra, said by phone. “Keeping the key rate where it’s at will mean inflation will be worse than what they are projecting.”

Economists surveyed by the central bank expect growth to slow to 1.16 percent this year, according to the survey published on June 23. Those analysts also expect inflation to accelerate to 6.46 percent.

Brazil’s inflation is under control, and the country has conditions for continuous economic growth, Rousseff said on June 10 in Brasilia. The central bank targets annual inflation of 4.5 percent, plus or minus two percentage points.

Latin America’s largest economy grew a revised 2.5 percent last year.