UPDATE 1-Brazil central bank improves GDP forecast for the year, sees weaker bank lending

(Adds details, context)

BRASILIA, March 30 (Reuters) -

Brazil's central bank improved on Thursday its economic growth projection for this year while worsening its outlook for bank lending amid a growing debate on a potential credit crunch due to high borrowing costs.

In its quarterly inflation report, the central bank forecast a 1.2% GDP expansion in 2023, up from the previously estimated 1.0% in December, still marking a significant slowdown from last year's 2.9% growth.

The bank said that the "moderate revision" reflects positive surprises in the services sector in the last quarter, leading to a slightly higher statistical load for the sector in 2023. It added that improved estimates for the extractive industry and positive first-quarter indicators have also been considered.

Regarding bank lending, the bank now expects a 7.6% rise in 2023, down from 8.3% in its last report, amid negative surprise data from the previous quarter and "an increase in the expected path for the basic interest rate."

Following the high-profile bankruptcy filing of retailer Americanas earlier this year, the central bank stated in the report that non-earmarked credit to companies is now expected to grow 6% this year from 8% before, "considering the environment of greater risk aversion in the short term as a result of specific events related to large companies."

Policymakers

held

the bank's benchmark interest rate at a six-year high of 13.75% for the fifth consecutive time last week, citing concerns about worsening inflation expectations and reiterating they may resume hikes if needed. This message was reinforced in the report.

The hawkish stance has sparked fresh

criticism

from new leftist President Luiz Inacio Lula da Silva, who has repeatedly argued that the high level of interest rates is unjustified in light of cooling

inflation

and should instead act as a drag on activity. (Reporting by Marcela Ayres; Editing by Steven Grattan)