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Financials

UPDATE 2-Brazil central bank lowers reserve requirements to free up funds, mulls further cuts

(Adds central bank director comments)

BRASILIA/SAO PAULO, Feb 20 (Reuters) - Brazil’s central bank said on Thursday it would lower banks’ reserve requirements on time deposits to 25% from 31%, starting on March 16, in a move that will free up an estimated 49 billion reais ($11.2 billion) of liquidity.

In June, the central bank cut the requirement to 31% from 33%, aiming to improve market efficiency. Economy Minister Paulo Guedes said last year up to 100 billion reais could ultimately be released into the economy over time using that mechanism.

Monetary policy director Bruno Serra said the central bank is also considering additional cuts in reserve requirements in the medium to long term.

At the same time, the central bank also raised the share of short-term reserve requirements, a measure it said should lower the amount banks need to hold in high quality liquid assets by a further 86 billion reais. The central bank said this should help reduce the overlap between the two instruments.

“Together, these two measures should mean that for every new deposit raised, the amount financial institutions have to put towards complying with these regulatory requirements should be reduced by an average of 8.5 percentage points,” the central bank said in a statement.

Banks must hold short-term assets in reserve in case they run into liquidity emergencies, while reserve requirements can be used to help set liquidity levels across the banking system and support broader financial stability, the central bank said.

Proceeds freed up from reserve requirements are likely to be used by banks in new loans and help narrow lending spreads, which remain high and are seen as a major barrier to boosting credit across the economy.

Lending spreads fell to 28.5 percentage points in December, the lowest level last year, although that was still up from 27.8 percentage points a year earlier, central bank figures last month showed.

Serra ruled out the use of lower reserve requirements as a tool to stimulate the Brazilian economy, saying Brazil is just closing the gap with other countries.

$1 = 4.3850 reais Reporting by Isabel Versiani and Camila Moreira; Writing by Carolina Mandl and Jamie McGeever; editing by Chizu Nomiyama and Steve Orlofsky

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