UPDATE 1-IMF says Brazil has scope for additional stimulus

Tue Jul 28, 2009 2:33pm EDT
(Adds details, background)
WASHINGTON, July 28 (Reuters) - The International Monetary Fund on Tuesday said Brazil had room for additional monetary and fiscal policy easing should its 2009 economic growth outlook deteriorate from a projected 1.3 percent decline.
In its annual review on Brazil's economy, the IMF said further stimulus will, however, be subject to careful monitoring of market reaction.
"(IMF) Directors welcomed signs that the Brazilian economy has begun to improve and considered Brazil to be in a favorable position to weather well the global crisis," the IMF said.
"If the growth outlook were to deteriorate significantly from the authorities' current projections, Directors saw room for additional fiscal and monetary easing, subject to careful monitoring of market reaction."
Real gross domestic product is forecast to fall at a 1.3 percent annual rate this year after expanding 5.1 percent in 2008. The economy is projected to expand 2.5 percent in 2010.
Brazil's central bank has cut lending rates by 450 basis points since January this year and an equivalent of 3.5 percent of GDP in liquidity has been released through reductions in reserve requirements.
The IMF stressed the need to contain current expenditure, including wages, which will be difficult to reverse as the economy recovers.
It was important to keep public debt on a declining path over the medium term, the Fund said, and welcomed the government's plans to return to a higher primary surplus.
The IMF said its board of directors agreed that intervention to address disorderly market conditions remained appropriate and assessed Brazil's exchange rate to be broadly in equilibrium.
"Directors welcomed recent proposals to change the taxation of savings accounts, noting that further changes may be needed to facilitate monetary easing. They also encouraged efforts to lower the high interest rate spreads," the IMF said. (Reporting by Lucia Mutikani; Editing by James Dalgleish)