UPDATE 1-Brazil urges banks to increase loans as economy reacts

Fri Aug 17, 2012 2:06pm EDT

* Tombini, Mantega say banks have room to boost loans

* Economy starting to pick up pace after flurry of stimuli

* Economists say strength of recovery still uncertain

By Carolina Marcondes

SAO PAULO, Aug 17 (Reuters) - Brazil's top economic officials called o n F riday on state-owned and private banks to step up credit disbursements to help the economy, which is finally starting to shows signs of recovery.

Speaking at different events in the business hub of Sao Paulo, Finance Minister Guido Mantega and central bank chief Alexandre Tombini said there is room for banks to give out more credit at better terms.

"Financial institutions have the financial capacity to expand credit supply," Tombini said in a speech to auto executives. "Granting credit on more favorable terms will be an instrument to attract and maintain customers."

Mantega said state-owned Banco do Brasil, the country's largest lender, should take bolder action to boost lending as a way to pressure private banks into offering more credit.

Since the start of the year President Dilma Rousseff has raised pressure on private banks to cut rates and give out more loans to bolster Brazil's cooling economy.

Both Mantega and Tombini said the nearly stalled economy is starting to react to a year-long flurry of tax and interest rate cuts aimed at supporting local demand. Stronger-than-expected retail sales and a pick-up in economic activity in June are signaling that the recovery could be picking up speed.

"The economy is already partially responding to (stimulus measures), and this response tends to deepen," said Tombini, who as head of the bank has trimmed 450 basis points from the benchmark Selic rate since August to a record low of 8 percent.

In a hint that the central bank could keep cutting rates, Tombini said prices should remain under control even as the economy recovers. Most economists expect the bank to slash the Selic by half a percentage point later in August.

However, many economists say the recovery is on shaky ground as the industrial sector remains extremely weak.

For years local industries have struggled with a stronger local currency, growing competition from abroad and soaring output costs due to inadequate infrastructure and high taxes.

The Brazilian economy has reacted very slowly to the barrage of stimulus measures and the aggressive rate-cutting cycle, barely growing since mid-2011.

Data Friday showed that Brazil's economic activity climbed in June at its fastest pace since March 2011.