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BRASILIA, May 16 (Reuters) - Economists at Bank of America Merrill Lynch on Thursday slashed their Brazilian growth forecasts and changed their interest rate call to predict aggressive policy easing this year, reflecting the darkening outlook for Latin America's largest economy.
They are among the most radical revisions in a series of outlook changes recently in which investment banks, the Brazilian government and central bank have all concluded that the economy is weak and will continue to struggle.
BAML economists now expect the economy to expand by 1.2% this year compared with their previous forecast of 2.4% - they had predicted 3.5% earlier this year - and cut their outlook for next year to 2.2% growth from 3.0%.
With growth weak and inflationary pressures benign, they now think the central bank will cut interest rates to 5.50% from 6.50% and keep them there through 2020. Previously, they had penciled in 75 basis points of rate hikes next year to 7.25%.
The main reasons for the underperformance are delays to pension reform, the government's tight fiscal policy and high unemployment. Congressional approval of the government's pension reform proposals may relieve the pressure, but it will take time for the positive economic effects to be felt, BAML said.
"The economy is on stand-by waiting for the reform which led to stagnation in growth: investments on hold; labor market stopped improving; IPOs on hold; privatizations and asset sales postponed; confidence declining," they wrote in a note on Thursday.
"Pension reform approval is key to seeing progress on rest of the agenda. Yet the growth pickup will be gradual as structural reforms take time to impact the economy," they said.
The current market consensus is settling on 2019 GDP growth of around 1.5%. Earlier this week Economy Minister Paulo Guedes said that is the government's new forecast, down from 2.2%, and the central bank said there is a "relevant probability" the economy contracted in the first quarter.
BAML's economists also said the real will be weaker this year and next than previously anticipated. They now see the dollar at 3.80 reais by the end of this year, compared with 3.60 previously, and 3.80 at the end of next year, compared with 3.68. ($1 = 4.0370 reais) (Reporting by Jamie McGeever; editing by Jonathan Oatis)