Brazil Doubles Consumer-Credit Tax as Inflation Nears Limit
April 08, 2011, 3:59 PM EDTBy Andre Soliani and Matthew Bristow
(Updates the date tax will rise in second paragraph.)
April 8 (Bloomberg) -- Brazil doubled a tax on consumer loans yesterday and pledged today to adopt further measures as the government shifts its focus from waging war against exchange-rate appreciation to fighting the fastest inflation in more than two years.
Starting tomorrow, consumer loans excluding mortgages will be subject to a 3 percent annual tax, up from the previous rate of 1.5 percent, Sandro Serpa, undersecretary for taxation at the Tax Agency told reporters in Brasilia today.
Policy makers are adopting a blend of higher interest rates, measures to curb credit growth and budget cuts as they try to prevent inflation from breaching the 6.5 percent upper limit of their target range. President Dilma Rousseff’s team has turned its attention to quelling inflation because there isn’t much more it can do to prevent the currency from strengthening, said Pedro Tuesta, an economist for Latin America at 4Cast Inc.
“They still have tools to work on inflation, whereas in the foreign-exchange market they seem to have run out of tools,” Washington-based Tuesta said. “As hard as it is for them to accept a stronger real, they have to.”
Policy makers are trying to cool the economy after inflation in March reached 6.3 percent, the fastest in 28 months, and Brazilian manufacturers increased the use of installed capacity to a record 83.6 percent in February. The government aims to slow credit growth to an “adequate” level of 12 percent to 15 percent a year, Finance Minister Guido Mantega said.
Affect Demand
Speaking to reporters today in Sao Paulo, Mantega said some measures will affect Brazilian demand in the medium term and the government was prepared to take further action.
“The government won’t hesitate in taking measures to contain inflation,” Mantega said. “We have a heated demand, services heated and we don’t want overseas inflation here.”
Mantega also said today that a strong real would help contain inflation, though policy makers were focusing their anti-inflationary efforts on reducing demand and credit growth.
“It is true that” a strong real “would be good for inflation,” Mantega said. “But we don’t conduct this policy, our anti-inflationary policies are defined by the central bank and the Finance ministry aiming to reduce the level of consumption and demand.”
Interest Rate Futures
The yields on interest rate futures contracts fell across the board. Contracts maturing in July, the most traded in BM&F Bovespa stock exchange, traded little changed at 11.968 percent at 3:51 p.m. New York time. The real rose 0.9 percent to 1.5717 per dollar, heading for the biggest two-day gain in almost 10 months after the government signaled it’s more focused on fighting inflation than currency appreciation.
On April 6, Mantega extended a tax on foreign-based loans in an effort to stem gains in the real after the currency appreciated to a two-and-a-half year high this week. Even so, the currency continued to strengthen yesterday, going beyond 1.60 per dollar for the first time since August 2008, after it advanced 1.7 percent to 1.5863 per dollar. It was the biggest daily increase since Oct. 5.
Total outstanding credit in Brazil’s economy rose 21 percent from a year earlier in February, to 1.74 trillion reais ($1.1 trillion). Brazilian central bank President Alexandre Tombini told lawmakers March 22 that growth in consumer credit above 15 percent needs to be monitored “very carefully” to avoid “excessive risks.”
Credit Growth
The central bank forecasts credit growth of 13 percent in 2011, Tulio Maciel, acting head of the bank’s economic research department, said March 29. The average rate charged on consumer loans was unchanged at 43.8 percent in February, while the default rate rose for a third straight month, to 5.84 percent.
Traders are betting the central bank will raise borrowing costs 0.25 percentage point to 12 percent at its April board meeting, according to Bloomberg estimates based on interest-rate futures.
Mantega said policy makers could take additional steps to curb demand. “There isn’t only one tool against inflation; there are many tools that can be used and we are using them all,” he said.
“It signals a willingness on the part of the government to incrementally do more,” said Tony Volpon, Latin America strategist at Nomura Holdings Inc. in New York. “That’s a very powerful signal for the banking sector that unless loan growth slows down to the 12 percent to 15 percent level he’s talking about they will do more.”
Reserve Requirements
In December, the central bank raised reserve and capital requirements as part of its plan to fight inflation by reducing credit. The government has also increased taxes on foreign loans with the goals of slowing credit and limiting capital inflows that fueled a 46 percent rally in the real since the end of 2008.
In the minutes of its March 1-2 policy meeting, the central bank said that so-called macro-prudential measures to curb bank lending are a “rapid and potent” weapon.
“It helps curb credit growth while likely reducing the need for the central bank to hike the interest rate, which would exacerbate the real’s appreciation pressures,” said Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York.
Macro-prudential financial policies are “essential to contain financial-sector exuberance,” the International Monetary Fund said in a report published yesterday.
The central bank raised borrowing costs by half a percentage point at its January and March meetings, lifting the benchmark rate to 11.75 percent. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.
--With assistance from Felipe Frisch in Sao Paulo and Arnaldo Galvao and Iuri Dantas in Brasilia. Editors: Richard Jarvie, Robert Jameson
To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Matthew Bristow in Brasilia at mbristow5@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net
