June 25, 2019 / 12:38 PM / a year ago

UPDATE 2-Brazil should skirt recession but reform uncertainty clouding outlook -central bank

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By Jamie McGeever

BRASILIA, June 25 (Reuters) - Brazil’s economy is stagnating and price pressures are evolving “favorably”, but uncertainty surrounding economic and fiscal reforms is clouding the growth and inflation outlook, minutes of the central bank’s rate-setting committee showed on Tuesday.

Having shrunk in the first quarter of the year, Brazil’s economy is on track to flatline in the second, the minutes showed, thereby narrowly avoiding a technical recession.

Improving domestic financial conditions, fading shocks from last year, and a less challenging picture abroad thanks to potentially looser monetary policy in major economies should support a “gradual” economic recovery, the minutes said.

“After a slight decline in the first quarter of 2019, as a result of this loss of dynamism and some occasional shocks, gross domestic product (GDP) is expected to remain relatively stable in the second quarter,” the minutes said.

The minutes were for Copom’s June 18-19 meeting, where it held the benchmark Selic rate at a record low 6.50% while refraining from signaling looser policy on account of lingering uncertainty on the government’s economic reforms.

Lawmakers are currently debating the government’s pension reform bill, which aims to generate savings of around 1 trillion reais ($262 billion) over the next decade, shore up the public finances, and stimulate investment and economic growth.

Speaking in Brasilia after the minutes were published, central bank President Roberto Campos Neto said “concrete” progress on reforms were critical to fostering a sustained economic recovery and benign outlook for inflation.

“A possible frustration of expectations regarding the continuity of these reforms and adjustments may affect risk premia and increase the path for inflation over the relevant horizon for the conduct of monetary policy,” Copom said.

“The Committee judges that, at this time, this factor prevails in its balance of risks.”

But otherwise, the domestic scenario outlined was one of anemic economic growth and high levels of economic slack weighing on inflation, thus calling for stimulative policy.

Alexandre Schwartsman, a former central bank director, said it is “curious” that policymakers highlighted the improving balance of risks to inflation yet put far more weight on the one main upside risk “at this time”.

“Reality will assert itself: faced with a stagnant economy ... and declining inflation forecasts the central bank will start easing monetary policy in the second half of the year, possibly even before the (lower) House votes on social security reform,” he wrote in a note on Tuesday.

Brazil’s economy is expected to grow by less than 1.0% this year, even weaker than the subdued growth of the previous two years.

The Brazilian government’s leader in Congress said on Monday that the committee considering the pension bill in the lower house will put it to a vote this week, with the full house voting to take place next week. (Reporting by Jamie McGeever; Editing by Steve Orlofsky and Susan Thomas)

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