July 12, 2019 / 1:11 AM / 5 days ago

Brazil pension reform helps improve inflation outlook, says central bank chief

FILE PHOTO: Senior banking executive Roberto Campos Neto, nominee by Brazilian President Jair Bolsonaro to head the Brazil's Central Bank, participates a meeting at Economic Affairs Committee (CAE) of the Brazilian Federal Senate in Brasilia, Brazil February 26, 2019. REUTERS/Ueslei Marcelino

BRASILIA (Reuters) - Brazil Central Bank President Roberto Campos Neto on Thursday welcomed the approval by Congress of a landmark overhaul of the country’s pension system, saying the reforms help create a benign outlook for inflation.

In an interview with the GloboNews television channel, Campos Neto said Wednesday’s resounding vote by lower house lawmakers represented an important moment for the economy and improved the perception of Brazil in the eyes of investors.

“Obviously, a breakthrough on reforms makes the inflation scenario in the future more benign,” Campos Neto told GloboNews. “The prevailing factor (in the risks to inflation) is reforms. Progress on reform is improvement in this sense.”

The lower house of Congress on Wednesday passed the main text of the government’s pension reform bill 379-131, well beyond the 308 votes required. It now faces a second-round vote before going to the Senate for final approval.

The central bank kept interest rates on hold last month, noting that the upward risk to inflation from uncertainty over economic reforms outweighed the downward risks from a slowing global economy and large degree of slack in the local economy.

Campos Neto and other central bank officials have been keen to stress there is no mechanical link between progress on reforms, particularly pension reform, and interest rates. What matters is the impact on inflation.

But it is a link financial markets have made, as traders bet that approval will pave the way for the central bank to start cutting its benchmark Selic interest rate, already at a record low 6.50%, perhaps as soon as the next rate-setting meeting later this month.

Financial markets are now pricing in 100 basis points of easing over the next year.

President Jair Bolsonaro is staking much of his political capital on the bill, which aims to shore up the country’s costly social security system, save the public purse around 1 trillion reais ($267 billion) over the next decade, boost investment and kick-start the flagging economy.

Reporting by Jamie McGeever; Editing by Sandra Maler and Lisa Shumaker

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