You cannot set a custom template for the latest posts page. This setting is ignored for it. The template that is used for this page is determined by the Template Hierarchy.
So if you start at the left for Blog Posts Index Page you’ll see that it uses home.php for its template, if it exists, otherwise it uses index.php.
But if your homepage is set to show the latest posts then front-page.php will be used if that exists.
PS: You’re running a 2 year old version of WordPress, and should update as soon as possible.
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