December 20, 2016 / 2:52 PM / 2 years ago

UPDATE 2-Brazil's central bank to add excess reserves to toolkit

(Adds analyst comment and context)

By Alonso Soto

BRASILIA, Dec 20 (Reuters) - The Brazilian central bank will add excess reserves to its toolkit to control liquidity and increase the efficiency of monetary policy, central bank chief Ilan Goldfajn said on Tuesday.

In a briefing, Goldfajn announced measures to reduce credit costs for companies and consumers in the medium- to long-term as part of the government’s push to revive an economy mired in recession.

He said the creation of the excess reserves, a mechanism in which the bank pays interest on excess reserves kept at the bank, is not aimed at reducing the fiscal deficit or the country’s debt burden.

“We are here presenting our agenda for the future,” Goldfajn said. “We are showing that the central bank can go beyond monetary policy and inflation targeting.”

He said the government will have to submit legislation to allow for the creation of the excess reserves, which will complement repo operations and reserve requirements as tools to control market liquidity.

Analysts say the use of excess reserves will reduce repo operations with federal securities, which have helped inflate the public sector’s gross debt to 70 percent of gross domestic product.

Other measures announced by the central bank include simplifying reserve requirement rules to lower costs for banks as well as improving foreign exchange regulation and lowering the time that credit cards have to repay vendors.

Many of those steps had been considered by previous governments to improve the country’s financial framework and reduce the banking spread, or difference between the interest that banks charge on their loans and their cost of funding.

“These measures aim to streamline and simplify. They are trying to bring some dynamism (to the economy), but those measures will not have short-term impact,” said Jankiel Santos, chief economist with Haitong. (Additional reporting by Marcela Ayres and Luiz Gerbelli; Editing by Paul Simao)

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