(Adds details on primary surplus, banks in paragraphs 8-11)
WASHINGTON, Aug 5 (Reuters) - Brazil's currency, the real
In its annual review of Brazil, the IMF said huge foreign capital flows into the country's booming economy had complicated monetary policy. It called for a "carefully calibrated policy mix" to preserve economic and financial stability" in tackling the surge of money into Latin America's largest economy.
The IMF emphasized that monetary policy should remain focused on keeping inflation expectations well-anchored.
The government last year slapped a 2 percent tax on inflows to curb the rapid flow of money into Brazil and to contain a rally in the local currency .
The real is down about 1.7 percent so far this year. The government said on June 21 it would prevent the real from strengthening further if inflows increased.
The IMF said while it recognized the need for the tax to curb capital inflows, it suggested it should only be a temporary solution.
The IMF said its "directors suggested that consideration be given to a long-term response that combines a tightening of fiscal policy, a lower interest rate, and prudential measures."
The IMF welcomed plans to withdraw fiscal measures put in place to keep the economy afloat during the financial crisis and to aim for a higher primary budget surplus target for 2010, a presidential election year in Brazil in which spending is set to rise.
In the 12 months to April, the primary budget surplus was equivalent to 2.17 percent of gross domestic product, still below the government's target of 3.3 percent of GDP for this year.
The IMF urged further steps to lower both gross and net debt-to-GDP ratios in Brazil.
The IMF urged the government to keep an eye over the recent increase in lending to the household sector. Some IMF board directors called for a thorough evaluation of the composition and quality of the capital of public banks. (Reporting by Lesley Wroughton; Editing by Leslie Adler)