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UPDATE 2-Brazil economy to shrink about 5% this year, rebound 4% or more next year -central bank head

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BRASILIA, Sept 2 (Reuters) - Brazil’s economy is on course to shrink by about 5% this year and grow by 4% or more next year, central bank chief Roberto Campos Neto said on Wednesday, stressing the importance of the government resuming its agenda of strict fiscal discipline.

Speaking in an online interview with Bloomberg, Campos Neto said the huge emergency spending triggered by the COVID-19 pandemic was a “detour” and that a return to a credible fiscal path was essential to securing a sustainable recovery and keeping inflation and interest rates low.

Campos Neto acknowledged the importance of direct transfers to millions of Brazil’s poorest people in preventing an even steeper economic slump, but said those and other emergency measures expiring on Dec. 31 should not be extended.

“If we don’t take care of the fiscal limitations we will lose credibilty ... and that would probably force us to have higher interest rates, and expected inflation would go higher. We don’t want to go back (to the past),” he said.

“We need to take care of the poor people, but we need to understand we have fiscal limitaitons,” he said.

Brazil’s economy shrank by a record 9.7% in the second quarter, with household spending tumbling 12.5%. That was despite millions of families receiving monthly stipends of 600 reais ($112), which the government has extended through the end of the year, but at 300 reais a month.

Economists warn that the sudden removal of that support could have severe consequences for the recovery.

Campos Neto repeated his view that any room for further cuts to the benchmark Selic interest rate, currently at a record-low 2%, was “small.”

Any bond buying from the central bank should be done to address issues of market liquidity and dysfunction, he said, not for monetary policy purposes. The bank should not use its balance sheet for fiscal policy because that tends to “end badly.”

On foreign exchange, Campos Neto said market volatility was higher than it should be, likely due to record-low interest rates and fiscal uncertainty. The central bank lacks the tools to tackle it right now, but intervention is always an option if needed, he said.

$1 = 5.3765 reais Reporting by Jamie McGeever; Editing by Chizu Nomiyama and Alistair Bell

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