Measure suggests a compromise between hawks at the COPOM and the Rousseff administration
July 28, 2014: Citing the slowdown in bank lending, the Brazilian central bank (BACEN) on July 25 announced a reduction in the amount of reserve requirements, totaling about BRL30bn (or 7.5% of the total outstanding amount).
Reserve requirements have been utilized by BACEN in the past as a counter-cyclical tool, both to stabilise financial market conditions, especially in the face of financial market distress, and as a complementary tool to the policy rate.
As such, under the scope of macro-prudential measures, reserve requirements were cut in the aftermath of the 2008 crisis, and have since been rising, sometimes in the context of addressing excess in lending such as in 2010, with measures targeting auto-lending in particular.
Friday’s decision appears to fall closer to being a complementary tool to the policy rate. As indicated by last Thursday’s policy minutes, COPOM members appear disinclined to cut the policy rate so soon after concluding the hiking cycle. The inflation outlook remains challenging, with unanchored inflation expectations and an unfavorable legacy of pending adjustments in regulated prices.
As we wrote however, several activity indicators have now reached levels not seen since the period following the 2008 financial crisis. Unlike 2009 however, there’s now little room to implement fiscal stimulus measures, directly or through state-owned banks.
Also, bank lending has been a primary concern of the federal government, with officials often emphasising the deterioration in bank lending metrics. Despite the government’s push to boost lending through state-controlled banks, total lending growth is now trending at the slowest pace seen in a decade (13% YoY, in nominal terms) amid gradually rising delinquencies and higher rates. Private-sector banks remain particularly cautious, with lending growth trending around 6% YoY, ie, contracting slightly in real terms, which compares with 19% YoY for public sector banks.
Overall, the July 25 announcement contrasts with the more hawkish message from the minutes of July 24, which explicitly dismissed the risk of policy rate cuts. As a result, it seems to suggest that it was a compromise solution between hawks in the COPOM and the Rousseff administration.