Brazil's inflation slows in early June as food prices fall

SAO PAULO, June 26 (Reuters) - Brazil's consumer price increases slowed more than expected in early June, with a drop in food costs offering some much-needed relief after the central bank last week raised interest rates to their highest in nearly two decades amid sticky inflation.

In Latin America's largest economy, the IPCA-15 consumer price index rose 0.26% in the month to mid-June, statistics agency IBGE said on Thursday, down from 0.36% the previous month and below the 0.30% expected by economists polled by Reuters.

Annual inflation stood at 5.27% in the period, IBGE said, slowing from 5.40% in mid-May and undershooting all estimates in the Reuters poll, which had a median forecast of 5.31%.

The lower-than-expected figures followed a drop in food and beverage prices, the statistics agency said, noting that the 0.02% decline in the period marked the first in ten months for the closely watched sector.

In contrast, housing costs rose on the back of higher electricity prices, IBGE added.

"The good news is the inflation cooling; the bad news is that the path to the 3% target is long," said Tatiana Pinheiro, chief economist at Galapagos Capital, describing the current central bank strategy as "well-founded".

The central bank last week raised interest rates by 25 basis points to 15%, a seventh consecutive hike that took borrowing costs in the country to their highest since July 2006.

Policymakers at the bank have been voicing discomfort with above-target inflation but signaled they should now keep interest rates steady for an extended period, as much of the impact from the tightening cycle is yet to be felt.

The bank, which has an inflation goal of 3% plus or minus 1.5 percentage points, said in a report earlier on Thursday that it expects inflation to begin slowing this year and hover near the official target by the end of 2027.

Banco Bmg Chief Economist Flavio Serrano said the benchmark IPCA inflation index should remain "well-behaved" in the coming months, but noted that the still-tight labor market and unanchored inflation expectations continue to pose challenges for the central bank.