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October 25, 2014
Thursday, August 21, 2014

Brazil looks to credit to fix economic turmoil

Brazil’s Finance Minister Guido Mantega, second from right, and Brazil’s then-Central Bank president Henrique Meirelles attend a press conference as they present the new design of real notes in Brasilia, in this file photo from 2010.

Central Bank intervenes again, offering US$11B in capital for loans in bid to halt stagnation

As Brazil’s Socialist Party (PSB) formally named its replacement candidate for October’s presidential election, the country’s Central Bank was continuing to battle economic turmoil yesterday, increasing the credit available for commercial loans in the hope of boosting the country’s stagnant growth figures.

The Central Bank, whose independence has been a hot topic for debate during electoral campaigning, has been looking for an economic bounce with the country in slowdown. As part of its efforts, it said yesterday it will increase the amount of capital available for commercial loans by at least 25 billion reais (US$11.1 billion).

Yesterday’s additions bring the total amount of potential stimulus in the last month to 70 billion reais (US$31.1 billion).

Opposition lawmakers have called on the bank to be given autonomy and independence from the government, a move that President Dilma Rousseff opposes, as does the head of the Central Bank Alexandre Tombini.

Rousseff and Tombini have repeatedly said the Central Bank has operational autonomy to make its own decisions.

Despite public unrest over infrastructure, healthcare, education, crime and corruption, the economy has become the main focus of campaigning for October’s election. After years of boom, Brazil’s economy is expected to grow just 0.79 percent this year, according to a survey released on Monday. It would be the lowest rate of annual Gross Domestic Product (GDP) growth since 2001.

The move by the Central Bank came on the day the PSB named a sucessor — environmentalist Marina Silva — to its former presidential candidate, Eduardo Campos, who died in a plane crash last week.

In the first major poll since Campos’ death, Datafolha pollsters said yesterday that Rousseff would receive 36 percent of the vote in the first round. Silva and Aécio Neves, of the centre-right Brazilian Social Democratic Party (PSDB), took 21 percent and 20 percent, respectively, meaning a runoff vote is exceptionally likely.

Neves has indicated that he believes the Central Bank should be more independent, with government intervening less in economic matters. Silva, who has not publicly backed a stance, is believed to favour more autonomy for the bank too, in order to win back credibility. Rousseff has also faced calls for the change from inside her own party and ruling coalition.

Credit, capital and inflation

The bank took two main steps in its effort to free up credit. The first was to cut the amount of capital commercial banks must keep on deposit with the Central Bank by about 10 billion reais. This is in addition to 30 billion reais freed up in a similar manner on July 24.

Second, the bank cut the amount of capital that banks must have to back commercial loans. This is expected to add another 15 billion reais to lending over time, the same amount expected from a similar measure in July, the bank said at a press conference in Brasilia.

The Central Bank has raised interest rates as well as the amount of capital commercial banks must keep with the Central Bank as a reserve in recent years, efforts taken to rein in consumer price inflation.

Fitch however, said the move by Central Bank would not “prove enough” to overcome many banks’ concerns about borrower credit quality, in the face of “the country’s macroeconomic slowdown.”

Highlighting the country’s “economic underperformance,” Fitch predicted that growth would stay Inflation, the agency pointed out, has been running above the bank’s targets since 2010.

The measures have not prevented Brazil’s inflation rate from reaching the 6.5 percent upper limit of the bank’s inflation target band. The target band is 4.5 percent plus or minus two percentage points.

This month’s range (August) is expected to fall within the official target range, Reuters reported yesterday, potentially sparing Rousseff another potential embarrassment in her re-election campaign.

Brazil’s inflation is expected to end 2014 at 6.25 percent, according to a weekly Central Bank poll of economists conducted by Reuters. It will probably remain around that level next year, they say, because of expected increases in government-regulated prices such as gasoline and electricity rates.

As Brazil’s economy has stalled, there have been more and more calls for Dilma Rousseff to ease credit to boost growth. In July, industrial output slipped 6.9 percent.

Brazil's currency, the real, weakened 0.2 percent against the US dollar to 2.2535 bid in early trading yesterday. Brazil’s benchmark Bovespa index, of the Sao Paulo stock exchanges most-traded shares rose 0.23 percent.

Herald with AP, Bloomberg, Reuters, Télam

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