Brazil raises reserve requirements to avert bubble

Brazil on Friday moved to cool its economy and fight inflation by raising bank reserve requirements in a step designed to help it fight back in the global currency wars by curbing a local lending boom without hiking local interest rates already among the highest in the world.

The policy change, which follows similar moves by China last month, aims to contain the growth in Brazilian credit, which is expanding 20 per cent a year. Along with a spike in global food prices, the lending boom has helped push inflation above the government’s target of 4.5 per cent a year.

Brazil already has the highest interest rates of any big economy – the central bank’s policy rate is 10.75 per cent a year while inflation is just over 5 per cent. Such high rates have drawn yield-hungry capital inflows, so contributing to a steady appreciation in the value of its currency, the real, and hitting competitiveness.

President Luiz Inácio Lula da Silva told foreign reporters in Rio on Friday: “All countries are worried that the US is taking unilateral action to solve its own fiscal problems without taking into account the impact on other economies.”

Henrique Meirelles, president of the central bank, told the Financial Times, the moves were designed “to rebuild Brazil’s systemwide liquidity buffer”. “The idea is to lean against the wind in order to contain excessive risk-taking in consumer credit,” he said.

The new measures increase bank reserve requirements from 8 to 12 per cent for current accounts and from 15 to 20 per cent for time deposits.They also place tighter controls on consumer lending, increasing capital requirements for banks making loans to be repayed over periods of 24 to 60 months.

Fears of a Brazilian credit bubble have grown following last month’s near collapse of Banco PanAmericano, a medium-sized bank that had grown quickly by lending to low-income consumers, especially to finance car sales. The bank needed a R$2.5bn rescue from a deposit guarantee fund after committing what the central bank called “accounting inconsistencies” to cover losses from default rates of as much as 20 per cent.

The central bank said the problems unearthed at Panamerciano had not been found at any other bank. They were discovered after the central bank ran a check on sales of credit portfolios and discovered Panamericano had kept some portfolios on its books after selling them and may have sold some portfolios more than once.

As one senior bank official said: “No central bank can say there are no problems in the financial system. In any system at any time there may be problems and that is what supervision is for.”