Cablegate: Central Bank Eases Reserve Requirement

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A
SUBJECT: Central Bank Eases Reserve Requirement

1. The Central Bank (CB) on Friday August 8 reduced its
reserve requirement on banks' demand deposits from 60 to 45%.
That requirement thus reverts to what had been its long-term
level from June 2000 until the CB raised it in February of
this year, at the peak of Brazil's recent inflation
uncertainties, in tandem with what was then the second
successive monthly hike under the new GoB of the SELIC
benchmark interest rate. (Prior to March 2000, the reserve
requirement was actually higher, at 65%.) The change does
not affect requirement on term deposits or savings accounts,
which remain at 23 and 30%, respectively.

2. Effective August 11, this move will free up eight billion
Reals (about USD 2.7 billion) for banks' use, according to
the CB's Monetary Policy Department. The GoB hopes this
money will be put to benign effect in the form of expanding
credit and reducing interest rates. Brazil's three biggest
national retail banks (Bradesco, Itau and Unibanco) have
already announced modest adjustments of some retail interest
rates -- from 9.3 and 9.35% to 8.7 and 8.9% per month (sic),
respectively, on private check-credit rates by Bradesco and
Itau, for example.

3. The drop had been universally awaited as a signal of the
GoB's anti-recessionary resolution. However, no-one believes
its direct effect will be anything more than marginal in
fomenting economic revival. Numerous commentators note, in
fact, that lack of demand for credit in Brazil's somber
current economic landscape may result in the freed-up funds
not going towards new loans at all, just into banks'
purchases of more GoB bonds, or of foreign currency.

4. The CB announcement came against a background of ever-
intensifying demands for GoB policies to stimulate growth,
plus work on a vaguely-described GoB package of emergency
measures (Septel). As token of the pressure, Chief of Staff
Dirceu had earlier been quoted conspicuously out-of-portfolio
as promising Brazil's governors that the reserve requirement
would be lowered by week's end. Amidst some media reports
that the decision was resisted by Central Bank professionals,
Finance Minister Palocci has since made a point of stressing
that it was made on purely technical, not political grounds,
and was justified by positive developments in Brazil's
inflation data and expectations.

5. A senior CB contact volunteered to us Friday afternoon
that the reserve-requirement change's impact seemed to have
been even more modest than the Monetary Policy Department had
hoped, to judge from the early exchange-rate reaction. He
implied further cuts in the rate might be considered, even
though, at 45%, it is now as low as it has been for years.

6. COMMENT: Brazil's economic focus will now be fixed on
the COPOM's (Monetary Policy Committee) next decision
concerning the SELIC rate, at its monthly meeting on August
20. With figures for industrial production showing a
sectoral recession already under way, and with recent
inflation numbers at least slightly better than had been
feared, clamor can only grow for the COPOM to chop the SELIC
by more than the 1.5% (from its present 24.5%) that the
market has already begun to anticipate. We expect the CB
not/not to bend to ongoing public and political protests over
the Lula administration's economic-policy course, but nor do
those protests look likely to abate

© Scoop Media

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