March 31, 2017 / 12:19 PM / a year ago

UPDATE 3-Brazil surprises with long-term rate cut, vows new benchmark

(Adds comments from BNDES CEO in paragraph 4)

By Alonso Soto

BRASILIA, March 31 (Reuters) - Brazil’s government surprised investors by cutting the main rate for long-term corporate loans to stimulate a faltering economic recovery, but vowed on Friday to keep a lid on loan subsidies with a new benchmark linked to market rates.

In an announcement that caught markets off guard late on Thursday, Brazil’s highest economic policy body, CMN, cut the TJLP long-term rate to 7 percent from 7.5 percent for the second quarter.

At the same time, the government said it would issue a decree to create a new long-term rate starting in 2018 to gradually replace the TJLP. The new rate will be linked to the IPCA inflation index and a fixed rate set monthly in accordance to the returns of local inflation-linked bonds known as NTN-B.

“The new benchmark should translate into lower borrowing costs for the economy as a whole, into a more effective monetary policy and into an easier framework for the pricing and securitization of those loans,” said BNDES Chief Executive Officer Maria Silvia Bastos Marques at a news conference.

It was the first cut of the TJLP rate, the benchmark for state development bank BNDES loans, since December 2012. The BNDES is by far the main provider of long-term loans for companies in Brazil.

For decades, the TJLP rate has run below the benchmark overnight lending rate, partly because of an effort by policymakers to boost growth and create jobs. However, the implicit subsidy in these loans contributed to a sharp increase in public debt, which cost Brazil its investment-grade rating.

“The government is acknowledging the dire situation of the economy,” said Andre Perfeito, chief economist at Gradual Investimentos. “The government clearly thinks the economy will continue to disappoint, but promises an overhaul of the TJLP because it believes the economy will take off next year.”

Economic activity fell more than expected in January after a string of negative data released this week that points to an even slower recovery after two years of recession, the deepest in Brazil’s history.

Central bank chief Ilan Goldfajn said the lower TJLP rate is a consequence of falling risk premiums and benchmark Selic rate.

Goldfajn added that the new long-term rate, which will be known as TLP, will not only reduce government subsidies but strengthen monetary policy and bolster capital markets.

Since October of 2016, the central bank has reduced the Selic rate by 200 basis points to 12.25 percent. (Reporting by Silvio Cascione; Editing by Grant McCool and Lisa Shumaker)

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