Brazil’s Central Bank Raises Banking Reserve Requirements

In a first step toward tighter monetary policy, Brazil’s central bank Wednesday raised banking reserve requirements on term deposits to 15% from 13%.

Central Bank President Henrique Meirelles said the changes were necessary to neutralize the impact of excess liquidity brought by reserve requirement reductions made in 2008, amid the onslaught of the global financial crisis.

The monetary authority had cut the amount of cash banks must keep in reserve to free up nearly 100 billion Brazilian reais ($54.95 billion) in liquidity as part of an effort to maintain local credit supply.

With Brazil’s economy now in recovery mode, the central bank is starting to rein in the stimulative measures.

In addition to the increase in reserve requirements, the bank also restored additional charges on cash and term deposits to 8% from 5% and 4%, respectively.

The increase in the basic term deposit requirement will become effective on April 9, while the additional charges will be introduced on March 22.

The measures will withhold 71 billion Brazilian reais from the country’s economy, which is estimated not to have grown at all in 2009 but is predicted to expand around 5.5% this year.

“This is an important step in the reversal of anticrisis measures,” Mr. Meirelles said. “We had already reversed foreign exchange policy measures and we needed only to restore reserve requirements. The financial system is already very liquid so these reduced reserve requirement levels were no longer necessary.”

Mr. Meirelles noted the latest measures were consonant with efforts recently taken in some other major economies as an exit strategy from crisis-oriented policy.

China has already moved to restrain bank lending by twice raising the share of deposits banks must keep on reserve, despite formally continuing the “moderately loose” monetary policy it introduced in late 2008.

The U.S. Federal Reserve just raised its discount rate on emergency loans by a quarter of a percentage point to 0.75%, while Australia’s central bank has raised its key policy rate three times. The Reserve Bank of India looks set to follow suit soon, amid growing worries about inflation.