August 27, 2019 / 3:57 PM / 22 days ago

UPDATE 1-Brazil's Campos Neto says GDP may not have grown in 2nd quarter, sees room for stimulus

(Adds detail, quotes)

By Marcela Ayres and Jamie McGeever

BRASILIA, Aug 27 (Reuters) - Brazil’s economy was stable or expanded slightly in the second quarter and while growth should pick up in the coming months, low inflation means there is room for more stimulus, central bank president Roberto Campos Neto said on Tuesday.

In testimony to the Senate’s economic committee, Campos Neto also said that the central bank is creating a new liquidity assistance program for banks, and that helping reduce the high interest rates banks charge customers is one of his main priorities.

“We estimate that GDP remained stable or grew slightly (in the second quarter). For the following quarters we expect an acceleration ... (but) our baseline scenario is that the underlying growth rate of the economy will be gradual,” he said.

Statistics office IBGE will release the first estimate of Brazil’s gross domestic product in the April-June period on Thursday. The median forecast in a Reuters poll of economists is for 0.2% growth, meaning Brazil will narrowly avoid falling back into a politically embarrassing recession.

The central bank cut its benchmark Selic interest rate to a fresh low 6.00% from 6.50% last month, and is widely expected to ease again next month. The only question among economists is whether it will lop 50 or 25 basis points off the rate.

Campos Neto repeated his view that a “benign” outlook for inflation, which is currently running comfortably below the central bank’s 2019 target of 4.25%, provides space for an “additional adjustment in degree of monetary stimulus.”

He also said that the central bank is creating a new liquidity assistance system for financial institutions so they will not need to hold high levels of reserves, money that can instead be freed up for lending and stimulating economic activity.

Part of the central bank’s push to liberalize Brazil’s economy and financial markets will be a bill that will simplify the country’s foreign exchange system. The bill, which will make it easier to do cross-border business and reduce import and export costs, is ready to go to lawmakers, Campos Neto said.

Asked about the increasingly sensitive subject of international foreign exchange reserves, Campos Neto said reliance on this “insurance policy” depends on how much progress is made on structural and microeconomic reforms. The more progress Brazil makes, the less need it has for reserves.

Earlier this month the central bank tweaked its exchange policy, a change that many observers said opened the door for Brazil to start selling at least some of its $385 billion pile of foreign exchange reserves, among the largest in the world. (Reporting by Marcela Ayres and Jamie McGeever Editing by Chizu Nomiyama and Steve Orlofsky)

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