(Bloomberg) -- Brazil’s inflation cooled more than expected in early April, but fell short of soothing policymakers’ fears about lingering price pressures on Latin America’s largest economy.

Official data released Friday showed prices increased 0.21% in the first two weeks of April from a month earlier, less than all estimates in a Bloomberg survey, whose median forecast was 0.29%. Annual inflation came in at 3.77%.

Swap rates on the contracts due in January 2026, which indicate market sentiment about monetary policy at the end of next year, sank 12 basis points in morning trading following the price data release.

Policymakers have been lowering borrowing costs and plan to cut the key rate by another half-point next month. Their subsequent moves are less clear. Inflation has come down significantly since its double-digit peak in 2022, but pressures stemming from tensions in the Middle East and surprisingly strong domestic growth drivers, including hiring, have caused concern that price increases could pick up again.

Read More: Brazil Analysts Raise Key Rate Forecasts for This Year And Next

Food and beverage prices advanced 0.61% while health and personal products gained 0.78%, representing the largest inflation drivers of the period. Meanwhile, transport costs dropped 0.49% as airfare became cheaper, the statistics agency said.

Worried Central Bank

Underlying measures of inflation, which strip out volatile items like food and fuel, also cooled. Still the report didn’t seem to allay concerns from Central Bank President Roberto Campos Neto. He indicated to reporters Friday that elevated levels of service inflation, a byproduct of a strong labor market, were still making policymakers uneasy.

The central bank is trying to reduce economic activity enough to bring the inflation rate down to its 3% target. That effort is running up against the plans of President Luiz Inacio Lula da Silva, who has increasingly indicated he will expand government spending to lift growth.

Investors have balked at the prospect of wider budget deficit, causing Brazil’s currency, the real, to slide in recent weeks. 

Economists warned that April’s price relief was unlikely to assuage policymakers’ worries about a deterioration of the real and the likelihood that Brazil’s public accounts will weaken in the medium term.

“With fiscal concerns building and the real under pressure, the pace of monetary easing is set to slow very soon,” William Jackson, Chief Emerging Markets Economist at Capital Economics, wrote in a research note.

Further complicating matters, the Federal Reserve is battling its own bout of sticky inflation and may have to delay starting monetary easing.

All in, the pressures add to the likelyhood that Brazil’s central bank might have to keep interest rates higher for longer. It has lowered the Selic by 3 percentage points to 10.75% since it began its easing campaign last August. 

--With assistance from Giovanna Serafim.

(Recasts lede, adds market reaction, inflation details and analysis throughout.)

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