Latin Finance - July/August 2011 - 27

central bank policy

government is looking a little bit more has been one of Brazil’s main drivers Since the boom in lending is mostly to the production side: that is, small and of growth, and curtailing it too much to consumers who pay very high interest medium-sized businesses,” she says. “The would have been too much to take, says rates on purchases – often ranging from government is afraid of the psychological Tony Volpon, head of emerging markets 70%-100% – some argue that the Selic’s side of inflation in Brazil,” made more research for the Americas at Nomura effectiveness at cooling down demand in dangerous by the country’s hyperSecurities in New York. the economy is often overstated. inflationary past, “but there is also the “Credit has been one of the big factors “Selic does matter but when you realization of the damage that high rates . . . if not the big factor behind the growth have an enthusiastic consumer in Brazil, have to local businesses.” in aggregate demand,” Volpon says. “The strong wage gains, strong employment But if this shift is happening, Loes government is worried about currency growth, Selic is the pea under the is unsure that this will negatively affect appreciation especially, and it’s trying mattress,” says Newman. “The princess his bank or the financial sector. “It’s a to lean on these kinds of direct macrocan feel it but a lot of others can’t.” riskier way of doing monetary policy, prudential measures to take some of the Containing Brazil’s credit boom will because of the potential of course help fight effects of over-kill inflation and indeed a Brazil Moves to Contain Inflation and Strength of Real on the financial broad group of market Macro-prudential measures implemented since October 2010 system, investors, and participants believe ultimately the growth the central bank is October 2010 of the economy,” heading in the right Loes says. “But as direction. IOF tax hike on capital inflows, lifting tax levied on all fixed-income investment flows to 4% for affecting the Brazil is not the IOF tax hiked again for fixed-income investments to 6% from 4%. profitability of the only emerging market December 2010 financial sector, I’m not country that has BCB increases reserve requirement, ups capital requirements for household credit operations sure.” gone down this path. with more than 24-month maturities and increases minimum deposits guaranteed by the FGC. Loes sees a Turkey, for example, larger impact on the took an arguably January 2011 investment community more unconventional BCB implements measures to limit short USD positions in banking system. It introduces a which, for instance, will approach late last year permanent 60% cash (non-interest bearing) reserve requirement on short-USD positions. have greater difficulties by increasing reserve March 2011 playing the yield curve requirements but Government extends the 6% IOF tax to short-term loans and security issuance. given the uncertainties cutting interest rates. Government extends 6% IOF tax to debt issuance/loans with duration below 720 days surrounding the “It makes sense to central bank’s new and use the whole range April 2011 untested approach. of policy instruments. Government temporarily doubles IOF tax levied on household credit to 3.0%. The finance Lupin Rahman, I think Brazil’s actions minister explicitly states that this is a macro-prudential measure, and it is aimed at moderating senior vice president on now are completely the pace of consumption growth. the emerging markets consistent with a lot Source: Barclays portfolio management of emerging market team at PIMCO, echoes thinking on the issue,” such thinking. She says that investors may pressure off interest rates. I think the says Jerome Booth, head of research at face some “unpredictability of policy” Ashmore Investments Management. mistake they made is that they’ve been if the central bank is seen making ad At the end of the day, however, unwilling to really bite the bullet and hoc decisions, though the move hasn’t central bank measures have a limited be forceful [with limits on consumer altered PIMCO’s investment strategy impact on curbing inflation unless they credit].” in Brazil. “On the margin it proves the are accompanied by progress in cutting However, Gray Newman, managing attractiveness of local rate positions if fiscal spending. director and senior LatAm economist at you believe that the CB is being proactive It is still early days for the effects of Morgan Stanley, says that perhaps too in terms of attacking inflation and credit the macro-prudential push to be known, much attention is paid to the inflationgrowth,” she adds. but an over-reliance on the strategy could fighting side of the macro-prudential At the other end of the debate, some pose risks for one of the most profitable approach. “They have been implemented analysts feel that macro-prudential banking systems in the world, long used first and foremost to deal with the measures will have a limited impact on to benefitting from high interest rates. prevention of credit bubbles forming,” he inflation as the government has failed to But there is little indication that the says. go far enough. Directing state-controlled government’s incentives for trying the This may make sense given the Banco do Brasil to pump credit into the increasing fear of a credit bubble in Brazil macro-prudential path should disappear economy after the financial crisis unfolded after a rapid expansion in retail lending. soon. LF

July/August 2011

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Latin Finance - July/August 2011

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