June 27, 2019 / 5:07 PM / 25 days ago

UPDATE 1-Brazil central bank chief sees economy recovering but warns of reform risk

(Adds detail, quotes)

By Jamie McGeever

SAO PAULO, June 27 (Reuters) - Brazil’s economy should recover in the second quarter of this year having shrunk in the first, but growth and inflation risks will likely change if pension reform is not approved, central bank president Roberto Campos Neto said on Thursday.

Speaking to reporters after the bank slashed its 2019 economic growth forecast to 0.8% from 2.0%, Campos Neto said the central bank assumes pension reform is approved by Congress, and that this stimulates economic activity.

Campos Neto also said there is no change to foreign exchange policy, and that the central bank will look at all instruments available and enter the market when liquidity problems arise or if there is a glaring mismatch in market prices.

A rebound in the second quarter of the year from the first, when the economy contracted for the first time since late 2016, would see Brazil narrowly avoiding recession, which is defined as two consecutive quarters of negative growth.

While failure to pass pension reform would force the central bank to reassess the balance of risks to growth and inflation, Campos Neto said there was no “mechanical” link between approval and an easing of monetary policy.

He also denied that the central bank’s repeated warnings that uncertainty surrounding reform is a major dark cloud hanging over the economy amounted to pressure or “blackmail” on lawmakers to get the bill passed.

“The market has a similar view to us on the risks surrounding (pension) reform. It’s one of the risk factors we analyze. If it’s not approved, sentiment will be different,” Campos Neto said.

“The second quarter should be more or less stable ... and our projection is for improvement in the second half of the year,” he said.

Earlier on Thursday, the central bank more than halved its growth forecast for this year and, aside from pension reform uncertainty that could put upward pressure on risk premia, outlined a relatively benign outlook for inflation.

Brazil’s special congressional pension committee on Thursday canceled its planned vote on the bill, calling into question whether the lower house plenary will vote and approve it by mid-July as the government hopes.

In a wide-ranging press conference, Campos Neto also said the central bank is taking steps to reduce consumer borrowing costs and narrow bank lending spreads, and that there has been no change to its exchange rate policy. (Reporting by Carolina Mandl and Jamie McGeever Editing by James Dalgleish)

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