Mantega Says Brazil Savings Rule Change to Allow Lower Selic

Brazil’s government will cut returns on new deposits to savings accounts, thereby paving the way for the central bank to further cut its benchmark lending rate, Finance Minister Guido Mantega said today.

Under rules announced today, returns on new savings accounts will amount to 70 percent of the benchmark Selic rate if it falls to 8.5 percent, plus a fluctuating Reference Rate, Mantega told reporters in Brasilia. While the decree to be signed by President Dilma Rousseff will go into effect tomorrow, it must be approved by Congress. The Selic is currently 9 percent.

“We are removing this obstacle, so that if conditions are favorable, the central bank can reduce the Selic rate further,” Mantega told reporters in Brasilia. “It’s not politics that’s driving us, it’s the will of the Brazilian people, who want more economic growth, more jobs.”

Government-mandated returns of more than 6 percent on existing savings accounts, after taking into account taxes and fees collected by asset managers, would have exceeded yields on local bonds if the central bank continued to reduce borrowing costs, making it more difficult for companies and the government to sell bonds.

“The Brazilian Finance Ministry has sent a very clear message to the Brazilian central bank,” said Jankiel Santos, chief economist at Espirito Santo Investment Bank in Sao Paulo. “Don’t worry about obstacles to trimming the Selic target rate. We’re here to get rid of them for you.”

The central bank pushed the Selic to a record low 8.75 percent in 2009-2010.

Policy Path

While Mantega said he had no idea if the central bank would raise or cut rates at its next monetary policy meeting on May 29-30, he gave as an example a rate cut to 8 percent to demonstrate the effect of the new rule on savings returns.

Mantega said there is no basis for comparison to Brazilian President Fernando Collor’s 1990 seizure of the savings accounts.

Central bank President Alexandre Tombini has cut the benchmark interest rate 3.5 percentage points since last August, more than any other central banker in the Group of 20 nations.

Nomura Holdings Inc. said before the announcement that it would cut its forecast for the benchmark Selic rate this year to 8 percent, from 8.5 percent, if the changes were made.

Rousseff would not be prepared to incur the political costs of limiting returns to savers except to make room for rate cuts larger than half a percentage point, said Tony Volpon, head of emerging-markets research at Nomura.

‘No Floor’

“Once you change the savings account rules, there is no floor for interest rates,” Volpon said in a telephone interview from New York before Mantega announced the rule change. “The government probably sees the possibility of the rate falling much further.”

Rates could go as low as 7 percent, Volpon said.

Brazil wants interest rates at international levels, Rousseff said at an event in Brasilia today. The country also doesn’t want its currency to be the victim of expansionary monetary policies by other nations, and wants lower taxes to guarantee productivity, the president said.

The yield on interest rate futures maturing in January 2013, the most traded in Sao Paulo, fell four basis points to 8.11 percent, as traders increased bets on rate cuts.

Traders are wagering that policy makers will reduce the overnight rate to at least 8.25 percent, according to Bloomberg estimates based on interest rate futures contracts.

Inflation slowed to 5.25 percent in mid-April, from 5.61 percent a month earlier. Analysts surveyed by the central bank expect Brazil to exceed the mid-point of its target range until 2017. The bank targets inflation of 4.5 percent, plus or minus two percentage points.

The recent depreciation of the real did not pose any inflation risks, Mantega said.

In the minutes to their April board meeting, policy makers said additional cuts will be “conducted with parsimony.”

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