Brazil: Central Bank tightens credit conditions to avoid the overheating of the economy
December 3, 2010
On 3 December, the Central Bank of Brazil (BCB, Banco Central do Brasil) unexpectedly announced several measures aimed at reducing liquidity in the domestic credit market. The measures include an increase in the reserve requirement ratio (RRR) on time deposits (from 15% to 20%) and on savings deposits (from 8% to 12%), as well as a hike in capital requirements for long-term loans to individuals (excluding mortgages). According to the BCB, the measures will remove BRL 61 billion (USD 36 billion) of liquidity from the economy. Together with the withdrawal of BRL 71 billion (USD 42 billion) implemented in February this year, the amount exceeds the BRL 100 billion (USD 59 billion) of additional liquidity injected by the end of 2008. The measures tighten monetary policy without hiking interest rates. Brazil already has one of the highest interest rates in the world, with the policy SELIC rate at 10.75%. The attractive yield has prompted huge capital inflows, fuelling the appreciation of the real, thus reducing the competitiveness of Brazilian exports. According to outgoing Central Bank Governor Henrique Meirelles, the measures ?will help avoiding the formation of bubbles and ensure the sustainability of credit growth?. Meirelles also stated that the decision is not a "substitute for monetary policy" actions such as raising interest rates. The monetary policy committee will be meeting on 7-8 December but is unlikely to raise rates before Alexandre Tombini takes over as new Central Bank governor in January.