(Adds regulation changes and context)
By Alonso Soto
BRASILIA, May 28 (Reuters) - Brazil's central bank on Thursday eased reserve requirements to encourage housing and agribusiness lending, but raised returns on term deposits kept at the bank, in a move that officials said will have a neutral effect on monetary policy.
In a joint decision with the country's top economic body, the national monetary council, known as CMN, the central bank said it will allow banks to deduct up to 18 percent of their compulsory requirements as long as they use the money for housing financing.
The central bank said the move could free up as much as 22.5 billion reais ($7.12 billion) for the struggling sector.
The bank will also free up another 2.5 billion reais for agribusiness credits. Both measures take effect immediately.
On the other hand, the central bank increased the returns on term deposits to mop up 25 billion reais from the banking system. The central bank said it will raise the returns to 25 percent from 20 percent in 90 days.
The central bank said the measures would have a neutral effect on inflation at a time when policymakers are increasing borrowing costs to ease price pressures.
"We believe it makes sense to free up some of those resources for banks to offer home financing instead of keeping that money at the central bank," Aldo Mendes, the central bank director of monetary policy, told a briefing.
Mortgage lending is drying up due to a sharp reduction in deposits in national savings, which provides most of the resources for home financing in Brazil.
The CMN also extended the minimum expiration term for mortgage-backed securities, known as LCIs, to 90 days. It also set a minimum expiration of 90 days to securities backed by agribusiness receivables, or LCAs.
The central bank is seeking to restrain short-term liquidity to ease inflation while directing more money into long-term funding.
Construction companies have called on the government to free up reserve requirements to bolster lending, but economists had warned that could further stoke inflation hovering at 11-year highs. In April, the annual rate was 8.17 percent.
A shrinking economy and a corruption scandal at state-run oil company Petrobras which involves the country's largest engineering firms have forced the sector to fire thousands of workers this year.
$1 = 3.1605 Brazilian reais Additional reporting by Marcela Ayres and Guillermo Parra-Bernal; Editing by Lisa Shumaker, Leslie Adler and Richard Borsuk