Brazil Raises Reserve Requirements as Crisis Eases

Brazil Raises Reserve Requirements as Crisis Eases

Feb. 24 (Bloomberg) -- Brazil’s central bank raised reserve requirements for banks, demanding they deposit an additional 71 billion reais ($39 billion), as policy makers end rules designed to increase liquidity during the global credit crunch.

“There is no more need for these measures,” central bank President Henrique Meirelles told reporters in Brasilia today. “The liquidity conditions are already adequate.”

To bolster economic growth, policy makers beginning in September 2008 injected about 100 billion reais into the economy by lowering the amount of money that banks must keep on reserve with the central bank. The bank also cut the so-called Selic benchmark lending rate to a record 8.75 percent in July 2009.

“The Brazilian monetary authority reckons that funding conditions in Brazil are no longer as problematic as they were in the aftermath of international jitters,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said today in a note. “The reserve requirement changes should not be taken as a shift in the monetary policy stance.”

Looser reserve requirements free up capital for banks to make loans and boost economic growth, while stricter reserve rules reduce liquidity and can help keep a lid on inflation. Brazil, Latin America’s largest economy, is emerging from its first recession since 2003, and economists have increased their inflation forecasts because of increased consumer demand.

Effect on Inflation

The measures announced today are “neutral” with regard to interest rates charged by banks, and policy makers continue to view the benchmark interest rate as its main tool for controlling consumer price increases, said Aldo Luiz Mendes, the central bank’s director of monetary policy.

Faster inflation may prompt the central bank to increase interest rates in April, according to the median forecast of analysts surveyed by the central bank for a study published Feb. 22.

Some of the new reserve requirements will take effect on March 22, while rules for timed deposits go into effect April 9.

As part of the changes, banks that had deposited government bonds with the central bank to satisfy their reserve requirements will have to substitute an equal amount of cash.

In September the central bank took its first step toward tightening reserve requirement rules. Banks, which had been allowed to satisfy reserve requirements by buying loans from lenders with up to 7 billion reais in assets, saw this limit reduced to 2.5 billion reais.

The limit will remain at 2.5 billion reais through June 30, the bank said today. Currently, the measure keeps 29 billion reais available for lending, it said.

February 24, 2010, 06:33 PM EST

By Andre Soliani and Maria Luiza Rabello