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Brazil announces US$13b credit stimulus

Brazil's central bank said it would ease banks' reserve requirements, freeing up US$13 billion to stimulate lending and boost an economy facing its fourth year of sluggish growth.

BRASILIA, Brazil: Brazil's central bank said on Friday (25 July) it would ease banks' reserve requirements, freeing up US$13 billion to stimulate lending and boost an economy facing its fourth year of sluggish growth.

The new measures, which also loosen the rules on lending to small businesses, come as leftist President Dilma Rousseff heads into October elections in which she is seeking a second four-year term.

"The central bank decided to adopt measures to improve the distribution of liquidity in the economy," the bank said.

It attributed the move to "recent moderation in credit concessions, relatively low levels of default and the reduction of risk levels in the financial system."

It said there was extra room for manoeuvre because total reserves in the banking system had risen from around US$87 billion in 2009 to nearly US$182 billion today (25 July), including a US$22.4 billion increase in the past 12 months.

Under the new rules, banks will be allowed to use up to 50 per cent of reserves for credit operations, new loans and diversified investment portfolios.

The bank also changed the way it calculates the reserves banks must keep on hand to cover their outstanding loans, basing the amount on the number of payments remaining rather than the total term of the loan. That could free up an additional US$6.7 billion, officials estimated.

Rules for lending to the vibrant small business sector were also eased.

SLOW GROWTH, RISING INFLATION

Brazil's economy registered a blistering growth rate of 7.5 per cent in 2010, the year Rousseff was elected to replace her popular predecessor and mentor, Luiz Inacio Lula da Silva. But the economy has since cooled, growing just 2.7 per cent in 2011, one per cent in 2012 and 2.5 per cent last year.

Analysts are forecasting growth of one per cent this year, with only a minor, temporary boost from hosting the World Cup in June and July.

The central bank is meanwhile fighting to contain rising prices. Annual inflation came in at 6.52 per cent in June, breaking the government's target ceiling of 6.5 per cent.

The bank has tried to tame prices by increasing the benchmark interest rate to 11 per cent, But the new stimulus measures will likely add fuel to the inflationary fire.

"We are seeing contradictory messages from the central bank. On the one hand, they are keeping interest rates high, but on the other hand they are freeing up liquidity," said the chief economist at investment firm Gradual Investimentos, Andre Perfeito.

The plan could also backfire, he added.

"It's not so easy. We'll see if banks want to lend more money or if families and companies want to take it. Business and consumer confidence levels are low," he told AFP.

The central bank is in a difficult position, said Silvio Campos Neto of consulting firm Tendencias.

"It's a very adverse climate. With the economy heading for stagnation and inflation that still refuses to fall, the central bank is trying to balance both situations," he told business daily Valor Economico.

Rousseff, Brazil's first woman president, is leading in opinion polls ahead of the October 5 first-round election.

A total of 38 per cent of likely voters back her, compared to 22 per cent for her main rival, social democrat Aecio Neves, and eight per cent for socialist Eduardo Campos, according to a survey released Tuesday by polling firm Ibope.

But she has also struggled to contain growing frustration over the economic slowdown and criticism of the state of Brazil's hospitals, schools and public transport systems.

Those frustrations erupted into mass protests that drew a million people into the streets last year, though the movement has since died down and recent protests have drawn numbers in the hundreds or less.

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