UPDATE 1-Brazil testing lower bound on rates but care needed -Campos Neto

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By Jamie McGeever and Marcela Ayres

BRASILIA, Aug 24 (Reuters) – Brazil is testing the lower-bound limit on interest rates, but great care is needed if that level is to be crossed given the potential negative effects on the banking system and financial markets, central bank president Roberto Campos Neto said on Monday.

Speaking in a live online debate hosted by newspaper Estadao, Campos Neto said the economy still requires huge stimulus but said that any room for further reduction in the benchmark Selic rate from its current record low 2% is small.

He reiterated his view that the so-called “effective lower bound” on interest rates is higher in emerging markets than in developed economies, and is historically even higher in Brazil.

“We understand that we need to extraordinarily high stimulus, but we also understand that there is a limit to emerging markets and how low you can go (on rates),” Campos Neto said.

“We are not saying that the minimum level cannot be crossed, but we are experimenting (with it) and we are saying that we must be very careful,” he said.

The central bank left the door open for further easing when it lowered its benchmark Selic rate by 25 basis points to 2.00% earlier this month.

Campos Neto also said on Monday he is open to transferring some of the central bank’s currency-related profit to the treasury, but warned that this must not be seen as direct financing.

The real has lost almost 30% of its value against the dollar so far this year, resulting in hundreds of billions of reais of paper profit for the central bank on its large stash of international reserves.

Campos Neto said some funds will be transferred to the cash-strapped treasury, but also said that it must carefully considered and that the central bank must retain a decent “cushion” to help cope with future bouts of market volatility. (Reporting by Jamie McGeever and Marcela Ayres Editing by Chris Reese and Jonathan Oatis)

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