By Bruno Federowski
SAO PAULO, Sept 21 (Reuters) - Yields paid on Brazilian interest-rate futures fell on Thursday as traders bet the central bank could cut rates below 7 percent after it reduced inflation forecasts for this year and the next.
In its quarterly inflation report, the central bank forecast inflation at 3.2 percent in 2017 and 4.3 percent in 2018, down from 3.3 percent and 4.4 percent, respectively, even as it revised upward its estimate for economic growth this year.
Soon afterward, a report showed inflation undershot analysts' expectations in mid-September and held near an 18-year low, suggesting the central bank will take its time to halt rate cuts.
Yields paid on interest-rate future contracts indicated growing bets that the central bank will cut the benchmark Selic rate by 75 basis points next month to 7.50 percent, with bets on a smaller 50 basis-point reduction nearly fading away.
Rate futures indicated the Selic would likely fall as low as 7 percent, an all-time low, but bets that it could drop even lower began to stir.
Economists at Bank of America Corp's Merrill Lynch cut their forecasts for the Selic at the end of the rate-cutting cycle to 6.5 percent from 7 percent, adding that they could remain low for longer.
Currencies in the region mostly weakened, extending the previous day's losses following the Federal Reserve policy statement.
The Fed on Wednesday signaled it still expects to raise interest rates by the end of the year despite a recent bout of low inflation, which could potentially drain funds away from high-yielding emerging markets.
Currencies of Chile, Mexico, Brazil and Colombia all weakened.
Still, strategists at BNP Paribas recommended clients use the opportunity to purchase the Brazilian real, saying U.S. rates are likely to remain low in the long term.
Reporting by Bruno Federowski; Editing by Lisa Shumaker