March 26, 2020 / 5:28 PM / 7 days ago

UPDATE 1-Brazil central bank focusing on bank liquidity, says FX intervention a success

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By Jamie McGeever and Marcela Ayres

BRASILIA, March 26 (Reuters) - Brazil’s central bank is closely monitoring financial markets and will intervene to provide liquidity where it sees fit, although this will not include buying companies’ debt, central bank president Roberto Campos Neto said on Thursday.

The main channel of support for the financial system remains ensuring banks have ample liquidity, Campos Neto said, adding that the central bank’s recent interventions to inject liquidity and ease stress in the currency market have been successful.

Speaking in an online virtual press conference after the bank slashed its 2020 economic growth forecast to zero due to the impact of the coronavirus, Campos Neto also said the bank was working toward bringing inflation up toward target.

“It was important to act to provide stability and liquidity (to banks),” Campos Neto said, noting the central bank’s recent measures to offer financing to banks in return for debentures collateral, and issue notes to banks backed by securitized loans.

“We don’t have the tools to buy debt directly, so we are putting together a package of measures to address the potential dysfunction in credit markets that could arise. But so far markets have functioned smoothly,” he said.

Campos Neto said the central bank is relaxed about the financial system, although it continues to monitor it closely and has increased the frequency with which it carries out bank stress tests.

He reiterated that the bank has a wide range of tools at its disposal to tackle market disruption amid the current crisis, and said its recent foreign exchange intervention has been a success and that it continues to monitor the market closely.

On inflation, Campos Neto said that all the bank’s forecasts using various interest and exchange rate assumptions show inflation below target, potentially as low as 2.6% this year and 3.2% next.

But economic policy director Fabio Kanczuk said the bank’s 50 basis point interest rate cut last week remained appropriate, even in light of the rapid deterioration in the economic outlook since then.

Campos Neto said policymakers discussed a wide range of potential scenarios surrounding the coronavirus shock but added that a more aggressive rate cut could have tightened financial conditions.

The hit to demand will have a greater bearing on inflation than the supply shock, Kanczuk said, a sign that the bank might cut rates again soon. (Reporting by Jamie McGeever and Marcela Ayres; Editing by Steve Orlofsky)

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