Brazil Joins China in Push to Cool Overheating Economy

Brazil’s central bank rolled out a series of measures to tame rapid credit growth and prevent inflation pressures, joining other large expanding economies such as China that are trying to curb rising prices and fast moving capital inflows.

Brazil’s Central Bank President Henrique Meirelles said the directives announced Friday, which aim to withdraw some 61 billion Brazilian reais ($35.88 billion) from the financial system, will have an impact on inflation and economic activity, and would also be felt in interest rates.

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The announcement comes as Brazil’s central bank monetary policy committee prepares to meet next week to decide whether to change the country’s reference Selic interest rate, currently set at 10.75% annually. It will be Mr. Meirelles’s last rate-setting meeting, as he will step down early next year to make way for Alexandre Tombini, a career central banker named by President-elect Dilma Rousseff. Some see the announcement’s as a first step toward a more aggressive policy stance against inflation.

“These measures cut liquidity in the market and prevent the formation of bubbles and risks that could be negative for the future health of the economy,” Mr. Meirelles said.

Economists say the strong growth of bank lending is one of the main factors that has been driving domestic Brazilian demand, and which has fed through into higher prices. The IPCA consumer price inflation index was 5.5% in the 12 months through mid-November, above the country’s year-end target of 4.5%.

Like China, Brazil is taking steps to prevent its economy from overheating, though Latin America’s largest economy is now starting on that path. On Friday, China, announced that it would shift to a “prudent” monetary policy next year, a move that formalizes the government’s change in priorities away from driving all-out economic growth toward combating inflation.

Striking a similar tone, Brazilian Finance Minister Guido Mantega said the reserve requirement measures will help curb excessive lending at a time of robust economic growth for the nation’s economy.

“Credit availability has risen significantly, and these measures will reduce it somewhat,” Mr. Mantega said. “There could be some increase in interest rates on loans as a result.”

The Brazilian stock market retreated on the news, with investors selling local assets, especially in the financial sector.

The Central Bank said it would raise reserve requirements on term deposits to 20% from 15% and raise its additional requirements on term and cash deposits to 12% from 8%. It raised capital requirements on loans to individual consumers that are longer than 24 months to 150% from 100%.

Earlier this year, Mr. Meirelles had suggested that changes to reserve requirements didn’t have a direct impact on decisions over interest rates, but he appeared to reverse that stance on Friday, raising expectations that higher interest rates could become likely as the new administration takes over in the new year.

“As we have seen during the past year, central banks have often been using reserve requirements as the first step down the tightening path, and such hikes have almost universally been followed by policy rate hikes as well,.” said Win Thin, Global Head Of Emerging Markets Strategy at Brown Brothers Harriman in New York.