MNI: Brazil Credit Slowdown To Permit Cuts -IMF Researchers

Brazilian monetary policy transmission is working well, and recent data on credit growth shows signs of a slowdown which will eventually pave the way for reducing interest rates, International Monetary Fund researchers who just published a paper on the subject told MNI.

The Selic rate pushes up borrowing costs in the economy when needed to reduce inflation, but other factors have recently boosted both supply and demand for credit, Daniel Leigh, the IMF's mission chief for Brazil, and Rui Xu, economist at the Monetary and Capital Markets Department, said in emailed answers to questions.

“Monetary policy transmission is working, pushing up borrowing rates in the economy when it is needed to reduce inflation, but other factors have boosted both supply and demand for credit. Recent data on credit growth already show signs of a slowdown, which will eventually pave the way for reducing interest rates," they said.

While analysts have recently questioned the effectiveness of Brazilian monetary policy given that activity and credit growth have continued to surprise on the upside even with a double-digit Selic rate, the researchers found that a 100-basis point increase in the policy rate raises lending rates by around 70 basis points after four months.

"This means that raising average bank lending rates in the economy by one percentage point requires a monetary policy rate increase of about 1.4 percentage points," they said, pointing to their working paper "Monetary Policy Transmission to Lending Rates: Evidence from Brazil," and emphasizing that its results do not necessarily represent IMF views.

LARGE GOVERNMENT-DIRECTED CREDIT

The response is not one-for-one mainly due to a relatively large share of government-directed credit — about 40% of the total credit market — that is less sensitive to changes in policy rates.

Pass-through varies from 40% to 80% across different types of market credit, the authors said. The study also concluded that pass-through has strengthened since the pandemic, reflecting more responsive corporate loan rates.  (See MNI INTERVIEW: BCB Likely To Start Cuts In December - Werlang)

"For a one percentage point increase in the policy rate, the lending rates for corporate working capital and unsecured consumer loans would increase by 80 basis points, whereas the rates on payroll-deducted loans would only increase by 40 basis points after ten months. The rates of government-directed credit react the least to the policy rate at 20%."

The Brazilian economy’s resilience, even with very tight monetary policy, has been driven by both cyclical and structural factors, they said.

"On the cyclical side, the economy has benefited from fiscal stimulus and record agricultural output, boosting consumer and corporate demand for credit.”

At the same time, Brazil has made significant structural changes that boosted credit supply.

"These developments include the rapid expansion of fintech lenders, such as Nubank, and capital deepening facilitated by tax-exempt debentures."

BCB kept its interest rate on hold at 15.00% in July.