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Brazil's central bank downgrades growth prospects

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Brasília (AFP)

Brazil's central bank said Thursday that inflation will keep falling next year, but issued a more gloomy outlook for growth after two years of deep recession.

Inflation, which hit a 13-year high in 2015 at 10.67 percent, will continue its gradual decline, the bank said, reaching 6.5 this year. This enters the government's target margins of 4.5 percent, with a two percentage points allowance either side.

Next year, inflation will drop to 4.4 percent and then 3.6 percent in 2018, the bank said.

The central bank, in its quarterly report, revised its GDP figures downward for a 3.4 percent shrinkage this year, from 3.3 percent. In 2015, the economy shrank 3.8 percent.

Next year, the bank still expects the economy finally to come out of negative territory, but only just. GDP will grow 0.8 percent, the bank said, down from the prediction last quarter of 1.3 percent.

Falling inflation should allow the bank to make cuts to its key interest rate, which is currently at 13.75 percent, one of the highest among any big economy and a big drag on investments.

According to market estimates, inflation will reach 6.5 percent this year, falling to 4.7 percent in 2017 and 4.5 percent in 2018.

President Michel Temer is overseeing far-reaching austerity reforms. A 20 year spending freeze was passed in the Senate this month and Congress is due to consider pension and labor rule reforms next.

Temer, who has rock bottom popularity and whose government is beset by a growing corruption scandal, said Thursday in Brasilia that his policies would boost the economy and ease credit for consumers.

He was due to meet later with union leaders to discuss the labor reforms.

In addition to the Petrobras corruption scandal rocking the government, Temer faces the possibility that the country's electoral court will declare the results of the 2014 presidential election invalid, due to alleged use of dirty campaign money.

However Temer dismissed any danger of being forced out of office Thursday.

"I have not thought about this," he told journalists. If the court did decide against him, "there would be appeals and more appeals."

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