Brazil Doubles Consumer-Credit Tax as Inflation Nears Limit

Brazil doubled a tax on consumer loans yesterday as the government shifts its focus from waging war against exchange-rate appreciation to fighting the fastest inflation in more than two years.

Starting today, consumer loans excluding mortgages will be subject to a 3 percent annual tax, up from the previous rate of 1.5 percent, according to a Finance Ministry statement.

Policy makers are adopting a blend of higher interest rates, measures to curb credit growth and budget cuts as they try to prevent inflation from breaching the 6.5 percent upper limit of their target range. President Dilma Rousseff’s team has turned its attention to quelling inflation because there isn’t much more it can do to prevent the currency from strengthening, said Pedro Tuesta, an economist for Latin America at 4Cast Inc.

“They still have tools to work on inflation, whereas in the foreign-exchange market they seem to have run out of tools,” Washington-based Tuesta said. “As hard as it is for them to accept a stronger real, they have to.”

Policy makers are trying to cool the economy after inflation in March reached 6.3 percent, the fastest in 28 months, and Brazilian manufacturers increased the use of installed capacity to a record 83.6 percent in February. The government aims to slow credit growth to an “adequate” level of 12 percent to 15 percent a year, Finance Minister Guido Mantega said.
Real’s Strength

On April 6, Mantega extended a tax on foreign-based loans in an effort to stem gains in the real after the currency appreciated to a two-and-a-half year high this week. Even so, the currency continued to strengthen yesterday, going beyond 1.60 per dollar for the first time since August 2008. The real appreciated a further 1.1 percent to 1.5703 per dollar at 8:06 a.m. New York time.

Total outstanding credit in Brazil’s economy rose 21 percent from a year earlier in February, to 1.74 trillion reais ($1.1 trillion). Brazil’s central bank President Alexandre Tombini told lawmakers March 22 that growth in consumer credit above 15 percent needs to be monitored “very carefully” to avoid “excessive risks.”

The central bank forecasts credit growth of 13 percent in 2011, Tulio Maciel, acting head of the bank’s economic research department, said March 29. The average rate charged on consumer loans was unchanged at 43.8 percent in February, while the default rate rose for a third straight month, to 5.84 percent.

Traders are betting the central bank will raise borrowing costs 0.25 percentage point to 12 percent at its April board meeting, according to Bloomberg estimates based on interest-rate futures.
More to Come

Mantega said policy makers could take additional steps to curb demand. “There isn’t only one tool against inflation; there are many tools that can be used and we are using them all,” he said.

“It signals a willingness on the part of the government to incrementally do more,” said Tony Volpon, Latin America strategist at Nomura Holdings Inc. in New York. “That’s a very powerful signal for the banking sector that unless loan growth slows down to the 12-15% level he’s talking about they will do more.”

In December, the central bank raised reserve and capital requirements as part of its plan to fight inflation by reducing credit. The government has also increased taxes on foreign loans with the goals of slowing credit and limiting capital inflows that fueled a 46 percent rally in the real since the end of 2008.
‘Potent’ Weapon

In the minutes of its March 1-2 policy meeting, the central bank said that so-called macro-prudential measures to curb bank lending are a “rapid and potent” weapon.

“It helps curb credit growth while likely reducing the need for the central bank to hike the interest rate, which would exacerbate the real’s appreciation pressures,” said Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York.

Macro-prudential financial policies are “essential to contain financial-sector exuberance,” the International Monetary Fund said in a report published yesterday.

The central bank raised borrowing costs by half a percentage point at its January and March meetings, lifting the benchmark rate to 11.75 percent. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

The yield on the interest rate futures contract maturing in January 2013, fell five basis points, or 0.06 percentage point, to 12.66 percent at 8:06 a.m. New York time.