Brazil Central Bank eases loan restrictions
July 26, 2014, 1:52 am

The Central Bank is hoping that its measures will increase the amount accessible to Brazilian banks so that they can lower interest rates [Xinhua]

Although the government predicts a growth rate of over 1.8 per cent (down from 2.5 per cent earlier this year), the Central Bank is hoping that the additional monies will increase the amount accessible to banks so that they can lower interest rates.

On Thursday, the Central Bank decided to keep its benchmark Selic interest rate at 11 per cent. While the Bank says this is to curb inflation – which ranges between 6.44 and 7 per cent – economists are worried that the high rates are slowing the economy.

Consumer confidence is dwindling, some economists say, as industry appears to slow down.

The Central Bank has in response said that “recent moderation in credit concessions, relatively low levels of default and the reduction of risk levels in the financial system” have allowed it to tap into its more than $180 billion reserves to ease lending restrictions to small banks and businesses.

“The central bank decided to adopt measures to improve the distribution of liquidity in the economy,” the bank added.

One measure was to more than double the number of banks which can use up to 20 per cent of their reserve requirements to provide loans for investment.

Some financial institutions will be allowed to use up to 50 per cent of their reserve requirements on term deposits that can be use to procure new loans.

If these stimulus measures work, the added liquidity will allow domestic companies as well as individual households to spend more in the local economy, thereby reversing the downward trend in overall market confidence.

Meanwhile, foreign investors are giving Brazil a more scrutinizing look, especially after a March announcement by US-based credit ratings agency Standard & Poor’s (S&P) that it had downgraded the Brazilian economy to BBB- from BBB.

Although S&P said that its outlook for Brazil in 2014 was stable, the new status means that Brazil is considered at the lowest investment grade by market participants.

S&P cited the sluggish economy and weaker-than-expected growth potential, rising debt, government debt and deficit as the reasons for its downgrade.

Coupled with a central bank poll in April which revealed that industrial production is expected to grow by 1.38 per cent this year, the latest figures offer a mixed bag to President Dilma Rousseff who has been trying to pull the economy back to its heyday just a few years ago.

Source: Agencies