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Brazil Central Bank Eases Consumer Credit Curbs as Economy Cools

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Nov. 14 (Bloomberg) -- Brazil loosened restrictions on consumer lending in a move that could shore up growth in Latin America’s largest economy and provide a boost to banks and car makers.

The central bank unwound most of the credit curbs that it imposed last December on auto loans, personal loans and payroll loans, according to a statement published on the bank’s website Nov. 11 after markets had closed.

“This measure will boost consumption and economic activity,” said Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos, in a telephone interview on Friday.

By providing extra stimulus, the easing of credit restrictions makes it less likely that policy makers will step up the pace of interest rate cuts this month, Perfeito said. Traders are split on whether the central bank will cut the benchmark Selic rate by 0.50 or 0.75 percentage point at their Nov 29-30 policy meeting, according to Bloomberg estimates based on interest rate futures contracts.

The central bank’s move comes as President Dilma Rousseff’s government debates whether to repeal other credit restrictions imposed over the last year, on fears that the economy could slip into recession, an official familiar with the talks said last week. In April, the Finance Ministry doubled to 3 percent the so-called IOF tax on consumer credit. Finance Minister Guido Mantega said last week that Brazil is bold enough to use all the tools at its disposal to prevent Europe’s debt crisis from spreading to the country.

Central bank President Alexandre Tombini reduced borrowing costs at each of the bank’s last two board meetings, citing a “substantial deterioration” in the global economy.

Capital Requirements

The monetary authority’s new rules allow banks to reduce the amount of capital the set aside for some loans with shorter maturities, while requiring them to increase provisions on some other loans with maturities that exceed 60 months. Banks are required to set aside capital of between 8.25 percent and 33 percent depending on the risk level of a loan, the bank said in its statement.

“The measures clearly aim to reduce pressures on individuals’ disposable income, which were mounting with inflation and the slowdown in the economy,” Carlos Firetti, an analyst at Banco Bradesco SA, wrote in a note to clients. The measures may also stoke inflation, Firetti wrote.

Total outstanding credit surged 19.6 percent in September from a year earlier, led by a 47 percent jump in mortgage credit. The default rate on consumer loans has risen continually this year, to 6.8 percent in September, from 5.7 percent at the start of the year, even as unemployment has remained close to record lows.

The central bank’s credit curbs contributed to a spike in interest rates charged to consumers, which rose to an average of 45.7 percent in September, from 39.4 percent a year earlier.

‘Prudential Character’

The central bank cut capital requirements for auto loans with maturities of less than 5 years, which could make it easier for consumers to access credit for car purchases.

Vehicle sales in Brazil fell to 280,567 units in October, down 7.5 percent from a year earlier and 10 percent less than in September.

The bank maintained at 15 percent the monthly minimum payment required on credit card loans. The bank said the adjustments are of a “prudential character” and are aligned with its mission of improving regulation of the financial system.

Brazil’s car industry, the world’s fifth-largest, is dominated by Wolfsburg, Germany-based Volkswagen AG, Turin, Italy’s Fiat SpA and Detroit-based General Motors Co., which control about two-thirds of the market between them.

Brazil’s economy has been showing signs of slowing in recent weeks. Industrial production contracted 2 percent in September, the second-biggest fall since the decline that followed the collapse of Lehman Brothers Holdings Inc. in 2008. Inflation slowed in October for the first time in 14 months, to 6.97 percent. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

To contact the reporters on this story: Matthew Bristow in Brasilia at

Arnaldo Galvao in Brasilia Newsroom at

To contact the editor responsible for this story: Joshua Goodman at

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