Last updated:
July 25, 2014 7:33 pm
Brazil injects $20bn into banking sector
Brazil
is freeing up more than $20bn in its banking system as Latin America’s
largest economy struggles to escape the grip of “stagflation” ahead of
presidential elections in October.
The central bank also nearly tripled the number of institutions eligible under that programme to 134 from 58 previously and, in a separate announcement, adjusted minimal capital requirements for retail credit operations.
It said the move was designed to “improve the distribution of liquidity in the economy” and was largely seen by economists as a way to unwind the so-called macroprudential measures introduced from 2010 onwards to rein in the country’s credit boom.
After impressing investors with growth of 7.5 per cent in 2010 – the highest rate in more than two decades – Brazil has since struggled to outpace developed countries, with forecast growth this year of only 0.97 per cent.
However, economists were less impressed. “The problem in Brazil is not funding or credit supply – both amply available from state-owned banks – it is low credit demand owing to the lack of business confidence,” said Tony Volpon, an economist at Nomura.
Investors
in Brazil frequently complain about government meddling in industries
such as oil and gas, sudden regulatory changes, and one of the world’s
most time-consuming tax regimes.
Alberto Ramos, an economist at Goldman Sachs, also gave warning that the measures threatened to undermine the central bank’s own monetary policy and “the ongoing quest to disinflate the economy and realign inflation to the elusive 4.5 per cent target”.
Only last week, the central bank voted to keep interest rates steady at 11 per cent for the second consecutive meeting, despite 6.51 per cent annual inflation.
While economists say Brazil
could end the year with inflation above the upper limit of the target
for the first time in a decade, the country is expected to grow less
than 1 per cent. Data next month may show the economy even slipped into
recession in the first half of this year.
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IN Americas Economy
With little leeway to change interest rates, the central bank announced
a series of measures on Friday to ease banks’ reserve requirements, and
changed the risk calculation for some loans, injecting an estimated
total of R$45bn ($20.2bn) into the economy.
Under the new rules, banks will be allowed to use up to half of their
reserve requirements on term deposits to boost credit operations or to
purchase loan portfolios from eligible financial institutions. The central bank also nearly tripled the number of institutions eligible under that programme to 134 from 58 previously and, in a separate announcement, adjusted minimal capital requirements for retail credit operations.
It said the move was designed to “improve the distribution of liquidity in the economy” and was largely seen by economists as a way to unwind the so-called macroprudential measures introduced from 2010 onwards to rein in the country’s credit boom.
After impressing investors with growth of 7.5 per cent in 2010 – the highest rate in more than two decades – Brazil has since struggled to outpace developed countries, with forecast growth this year of only 0.97 per cent.
While
Brazilians have continued to enjoy rising wages and record low
unemployment, recent data suggests the job market is finally starting to
adjust to the country’s gloomy economic outlook, endangering President Dilma Rousseff’s chances of re-election.
The central bank’s rule changes were largely welcomed by banks
themselves. In a rare statement from the chief executive of
Itaú-Unibanco, the country’s largest non-government bank, Roberto
Setubal said the rules would “create the conditions to boost credit in
some sectors of the financial market where liquidity was more
restricted”. However, economists were less impressed. “The problem in Brazil is not funding or credit supply – both amply available from state-owned banks – it is low credit demand owing to the lack of business confidence,” said Tony Volpon, an economist at Nomura.
Alberto Ramos, an economist at Goldman Sachs, also gave warning that the measures threatened to undermine the central bank’s own monetary policy and “the ongoing quest to disinflate the economy and realign inflation to the elusive 4.5 per cent target”.
Only last week, the central bank voted to keep interest rates steady at 11 per cent for the second consecutive meeting, despite 6.51 per cent annual inflation.
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