January 6, 2016 / 10:17 PM / 4 years ago

Brazil studies bolstering credit to stoke economy: source

BRASILIA (Reuters) - Brazil might press state-run banks to use billions of dollars recently obtained from the government to increase credit to consumers and businesses in order to avoid pressuring its overdrawn public accounts, a government official with knowledge of economic strategy told Reuters.

People walk outiside of the central bank headquarter building in Brasilia, Brazil, December 9, 2015. REUTERS/Ueslei Marcelino

President Dilma Rousseff is analyzing stimulus measures to jump-start an economy sinking into what could be the worst recession in the country’s modern history.

Rousseff’s popularity is near all-time lows. After she tightened credit and cut spending near the end of her second term last year, she is now working to change the gloomy mood of local businesses.

“The government is not thinking of flooding the market with fresh money. We want to signal economic agents that we will work to bring back stability, normalcy,” said the official, who requested anonymity because he was not allowed to speak publicly about ongoing discussions.

Last week, the administration repaid nearly 56 billion reais ($13.9 billion) it owed to state-run lenders Banco do Brasil (BBAS3.SA), Caixa Economica Federal and state development bank BNDES as well as the state workers’ pension fund, FGTS.

“Some of that money can be used to offer more credit lines at market rates,” said the official, who added that new Finance Minister Nelson Barbosa continues to analyze the measures.

The prospect of new stimulus has raised fears among investors that Rousseff will return to the expansive fiscal policies of her first term that eroded the public accounts and cost Brazil its investment grade rating.

It also places the administration on a collision course with the central bank, which has been signaling a rate hike later this month to curb a surge in inflation.

“The government is sending conflicting messages,” said Flavio Serrano, senior economist with Sao Paulo-based bank Haitong. “More credit will go completely against monetary policy. It goes against everything that was done last year.”

The central bank is under growing pressure from Rousseff’s Workers’ Party to lower its benchmark Selic rate, which at 14.25 percent is among the highest in the world.

Presidential aides have told Reuters the administration respects the central bank’s operational autonomy and will not pressure policymakers to keep rates on hold to avoid hurting the economy.

The Brazilian economy is expected to contract 3 percent in 2016 after shrinking nearly 4 percent last year, in the first back-to-back annual declines since the Great Depression of the 1930s.

($1 = 4.0293 Brazilian reais)

Editing by Matthew Lewis

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