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UPDATE 2-Brazil's rate path not tied directly to fiscal reforms, says Campos Neto

John Revill

Neto@ (Recasts, adds quotes)

ZURICH, July 2 (Reuters) - The path for Brazilian interest rates does not depend directly on the success or otherwise of the country's economic reforms, but on how that process feeds into inflation and inflation expectations, central bank chief Roberto Campos Neto said on Tuesday.

Speaking at an event in Zurich, Campos Neto also said Brazil has the financial buffers to protect the economy from shocks from abroad, but risks to domestic growth from a global slowdown may be greater than previously thought.

"We are not tying the reforms to the decision on the rates, but ... we are saying that risk factor is the most important now ... because the sensitivity of the market is telling us that," Campos Neto said in a question and answer session.

"(It) is not reforms themselves, but how this fits into the macro variable that feeds into the inflation channel," he said.

Brazil's central bank kept interest rates on hold at a record low 6.50% last month but expectations it will soon begin loosening policy immediately surged. Uncertainty over fiscal reforms was virtually the only reason policymakers did not explicitly signal an imminent shift, economists said.

The central bank last week cut its 2019 growth forecast to 0.8% from 2.0% and its 2022 inflation target was set at 3.50%, reflecting a steady decline from this year's 4.25%. As Campos Neto repeated on Tuesday, inflation variables excluding Brazil's fiscal adjustment process have evolved "favorably."

A congressional special committee is this week expected to publish its revised version of the government's key pension reform bill, which aims to shore up public finances and save the public purse around 1 trillion reais ($260 billion) over the next decade.

"We don't measure the probability of passing reforms, we can't make a decision based on that. There are other uncertainties ... we are watching all of them. It is not necessarily tied to one," Campos Neto said.

Campos Neto also said that Brazil has solid financial buffers, noting that foreign direct investment can fund the current account deficit nearly seven times over and that international reserves are worth around 20% of gross domestic product.

This will help shield Brazil from external shocks. But risks of spillover from the slowing global economy loom large.

"In light of evidence of economic slowdown in several countries, the global environment may be more relevant to the dynamics of economic activity than previously anticipated," he said, according to the text of his presentation on the Brazilian central bank's website.

Campos Neto also repeated the central bank's recent line that Brazil's economy will recover "in a gradual fashion," but like inflation, this will be steered by the reform process. (Reporting by John Revill in Zurich and Jamie McGeever in Brasilia Writing by Jamie McGeever Editing by Chizu Nomiyama and Jonathan Oatis)