INTERVIEW-Lower inflation, volatility to lift Brazil confidence -Mantega
* Finance minister cuts 2013 GDP outlook to 2.5 pct-3 pct
* Brazil willing to make 'sacrifices' to tame inflation
* Fed's more dovish tone to ease market turbulence
BRASILIA, July 19 (Reuters) - Slowing inflation and easing volatility in global markets should help reinvigorate investor confidence in Latin America's largest economy, Brazilian Finance Minister Guido Mantega told Reuters.
Mantega said the U.S. Federal Reserve's "confusing" messages about a possible withdrawal of monetary stimulus had caused significant stress in global financial markets, creating greater uncertainty for Brazil's economy, which has been struggling to pull itself out of a two-year rut.
Economists have been steadily lowering their 2013 growth forecasts for Brazil's economy in the past month, following disappointing industrial production and retail sales data. For the first time, Mantega acknowledged that Brazil may grow between 2.5 percent and 3 percent this year, down from a previous estimate of 3-4 percent.
Still, Mantega struck an upbeat tone about the outlook going forward, saying Fed's chairman Ben Bernanke more dovish testimony to the U.S. Congress this week help ease the market turbulence that sparked an exodus of capital from major emerging economies like Brazil.
"What hit market confidence recently were the actions taken by the Federal Reserve," Mantega said in an interview late on Thursday. "I believe we could be overcoming this period of turbulence ... when things calm down we should see a return of investment in fixed income and stocks."
Since taking office in 2011, President Dilma Rousseff has struggled to bring back the 4 percent annual growth rates that made Brazil a Wall Street darling the past decade.
Mantega, who gained worldwide notoriety for popularizing the term "currency wars" to describe developed nations' efforts to weaken their currencies with ultra-loose monetary policy, said more clarity from the Fed should help the Brazilian economy.
Less market volatility should stabilize the local currency at a weaker level, which would make Brazilian industry more competitive, he said. Brazil's currency and stock exchange have been some of the worst performers in the world this year.
Lower inflation stemming in part from more aggressive monetary tightening by the Brazilian central bank and a planned freeze in some budget spending should also bolster confidence and investment, Mantega said.
However, many economists blame erratic government policy as the main reason behind investors' mistrust, dragging down an economy that risks posting its third straight year of subpar growth despite an avalanche of stimulus measures.
Mantega, Latin America's longest serving finance minister, has been the target of fierce criticism for the underperformance of the economy. His sometimes overly optimistic growth forecasts have damaged the government's credibility, analysts say.
Rousseff, an economist herself, has repeatedly vowed to keep Mantega in his post despite calls from some investors to bring new blood into the government's economic team.
VOTE OF CONFIDENCE?
In what could be considered a veiled vote of confidence in Brazil, Fitch on Thursday kept the country's debt outlook at "stable" when many in the market expected the rating agency to follow Standard and Poor's, which cut its outlook in June.
Fitch acknowledged policy missteps in Brazil, but said the government was moving in the right direction to correct past mistakes.
In recent months, the Rousseff administration has raised return rates for investors in multi-billion dollar infrastructure projects, removed tough capital controls and promised to rein in government spending.
More importantly, Brazil's central bank has raised interest rates more than expected in what is considered one of the most aggressive tightening cycles in the world.
"You have to battle inflation even if that means making some sacrifices, having higher interest rates. That was done and it will help inflation expectations," Mantega said.
Inflation "was maybe the biggest problem we faced during the first half, but thankfully that is being overcome," he added, saying inflation would continue its downward trend without providing a year-end forecast.
Indeed, recent price indicators show inflation on the decline. The IPCA-15 consumer price index rose a less-than-expected 0.07 percent in the month through mid-July, down from 0.38 percent in the previous month-long period.
Annual inflation also slowed to 6.4 percent through mid-July, falling back within the government's target range, whose ceiling is 6.5 percent.
Most analysts and even the central bank expect inflation to end the year close to 6 percent after aggressive public spending, food supply shocks and persistently high services inflation. The surge in prices has eroded the country's main engine of growth: consumer spending.
Mantega insisted that lower inflation expectations and an upcoming round of infrastructure and oil concessions will support the economy in the second half of the year. Mantega said the economy likely expanded around 0.6 percent in the second quarter versus the previous one due to market volatility and a wave of protests against poor public services and corruption.
"Even in an adverse international scenario we can grow a little more," he said. "We want a private sector that is more active than the public sector. The private sector will now find a more favorable environment to make its investments."
For a full version of his interview in Portuguese, please click here:
(Writing by Alonso Soto; Editing by Todd Benson and Nick Zieminski)