Brazil cuts interest rates again, leaves door open for more

* Third straight 25-bp cut brings benchmark rate to 14.25%

* Next steps remain open despite worsening inflation outlook

* Policymakers flag new inflation risk tied to fiscal stimulus (Adds economists' comments in paragraphs 8-11)

By Marcela Ayres

BRASILIA, June 17 (Reuters) - Brazil's central bank cut rates at a third straight meeting on Wednesday and left its next steps open, acknowledging a tougher inflation outlook and risks from election-year fiscal stimulus.

The bank's rate-setting committee, called Copom, unanimously voted to lower its benchmark Selic rate by 25 basis points to 14.25%, a level last seen in May 2025, in line with forecasts from 41 of 45 economists polled by Reuters.

"The Committee reaffirms that the total magnitude of the calibration cycle will be established in light of new information," Copom wrote in its policy statement.

The decision comes as economists scale back expectations for easing this year amid an oil price shock linked to the U.S.-Israeli war with Iran.

Inflation expectations have risen steadily, including on longer horizons, as President Luiz Inacio Lula da Silva rolls out measures boosting household spending as he bids for re-election in October.

Policymakers introduced economic stimulus as an upside risk for inflation in their Wednesday statement, noting concerns of it "weakening some of the usual transmission channels of monetary policy."

MISSING 2027 TARGET

The central bank raised on Wednesday its annual inflation forecast for the relevant policy horizon, the fourth quarter of 2027, to 3.7% from 3.5% previously, further above the official 3% target. It raised this year's projection to 5.2% from 4.6%.

Jose Francisco Goncalves, an economist at the University of Sao Paulo (USP), noted the central bank's new language signaling that bringing inflation back to 3% by 2027 would push annual inflation below the target in the first quarter of 2028 - the relevant horizon for its next meeting in August.

"They are basically saying that what has already been done in monetary policy is enough to bring inflation to target. The pace at which the Selic will fall depends on global conditions," he said.

For Liam Peach, senior emerging markets economist at Capital Economics, policymakers seemed to be justifying the latest rate cut and keeping the door open to more easing despite worsening projections and rising inflation risks.

"The easing cycle is likely to become stop-start from here on, and the extent of further rate cuts will be data dependent as inflation continues to rise this year," he said. He now forecasts a total of 50 basis points of cuts in the next four meetings, bringing the Selic to 13.75% by the end of the year.

INFLATION RISKS MOUNT

Policymakers began cutting rates in March, arguing that their earlier aggressive tightening had produced visible effects on economic activity and lending, opening room for "calibration" of the benchmark rate while keeping it in restrictive territory.

Although oil prices have eased this week on signs of progress toward a U.S.-Iran deal to end their conflict, challenges for Brazil's central bank have mounted on other fronts since its last meeting in late April.

Annual inflation accelerated to 4.72% in May, while market expectations have risen not only for this year and next but also for 2028, signaling doubts about the bank's ability to anchor prices on a longer horizon, independent of current shocks.

Central bank governor Gabriel Galipolo has flagged the impact of a likely El Nino weather pattern as an additional supply-side shock to prices.

Economists have also noted that a government-backed bill in Congress to guarantee workers two days off each week could add to price pressures by raising costs in an economy where income growth has outpaced productivity in a tight labor market. (Reporting by Marcela Ayres; Editing by Brad Haynes and Sonali Paul)