Brazil Government Measures Fail to Slow June Credit Growth

Credit in Brazil’s economy last month continued to expand at its fastest pace of 2011, failing to respond to efforts by the government to slow its growth.

Total outstanding credit rose 1.6 percent in June to 1.834 trillion reais ($1.17 trillion), the central bank said in a report distributed today in Brasilia. The pace of expansion matched the rate seen in May.

Total credit rose 20 percent from a year ago, led by a 50 percent increase in mortgage credit.

“The fact that labor markets are still so strong may explain continued credit demand,” said Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York, in response to an e-mailed question. “Wages and employment are growing fast, and as a result the ability to get into debt is also expanding.”

Brazil has been adopting measures to slow consumer borrowing since December, to curb the fastest inflation in six years and prevent instability in the financial system. The central bank has raised the benchmark rate five times this year to try to cool the economy.

The average consumer default rate was unchanged at 6.4 percent. Company loan defaults were also unchanged at 3.8 percent. Defaults are likely to fall in the second half of the year, due to wage growth and low unemployment, the central bank’s economic department chief Tulio Maciel told reporters in Brasilia after the report was released.

Growth Slowed

Credit growth slowed to 1.1 percent in the first 9 working days of July, compared with the first 9 working days of June, Maciel said.

Consumer confidence recovered in June, and in July rose to its highest level since at least 2005. Unemployment fell to 6.2 percent in June, a record low for the month, down from 7 percent a year earlier.

The average interest rate charged on consumer loans fell to 46.1 percent in June, from 46.8 percent in May, the central bank said. The rate on company loans fell to 30.8 percent, from 31.1 percent.

The central bank last week announced a change in the rule on payroll-deductible credit card payments with long maturities as a further “prudential” measure. The new rule raises banks’ risk-provisioning requirements for payroll-deductible credit card operations, which will force them to raise capital provisions on loans with maturities exceeding 36 months.

Bank Requirements

In December, the central bank raised reserve and capital requirements to slow credit growth, and in April Finance Minister Guido Mantega doubled to 3 percent the so-called IOF tax on consumer credit.

Last month, the central bank raised its forecast for 2011 credit growth to 15 percent, from its previous forecast of 13 percent. Today’s report shows that the bank’s forecast was overly optimistic and is likely to be revised up, Rangel said.

The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, rose two basis points, or 0.02 percentage point, to 12.69 percent at 12:59 p.m. New York time.

Consumer prices rose 6.75 percent in the year through mid- July, the fastest pace since 2005. Brazil targets inflation of 4.5 percent, plus or minus two percentage points.

The central bank last week raised its benchmark Selic rate by a quarter point to 12.50 percent. In a one-sentence statement accompanying the decision, the bank’s board of directors withdrew a commitment made in April and June to raise rates for a “sufficiently long” period.

Traders are betting the central bank will hold rates at its August policy meeting, according to Bloomberg estimates based on interest rate futures.

To contact the reporter on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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