Brazil’s Central Bank Says Monetary Policy at Stake in Bank Suit

The future of Brazil’s monetary policy would be “compromised” if the Supreme Court rules against the nation’s biggest banks for implementing government policy in past decades, according to the central bank.

“If the Supreme Court deems the government’s economic plans unconstitutional, the state will have to rethink the way in which it conducts monetary policy,” said Isaac Ferreira, the central bank’s prosecutor, in a presentation to the country’s highest court.

Lenders including Itau Unibanco Holding SA and Banco do Brasil SA are being targeted by depositors seeking reimbursement for losses stemming from government policies adopted to fight hyperinflation in the 1980s and 1990s. Banks would have to pay 149 billion reais ($64.3 billion) to depositors and may reduce lending by as much as 1 trillion reais if the court rules against them, according to central bank estimates. That would be equal to 38 percent of outstanding credit in the financial system.

“The confusion and mess this would provoke would be very big,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by phone from Sao Paulo. “The lack of confidence and the credit crunch this would provoke could prompt the central bank to bring the tightening cycle to a halt.”

The statement by policy makers explaining yesterday’s increase of the benchmark Selic rate to 10 percent omitted language used in previous communiques to signal that additional half-point increases were needed to rein in consumer prices. That suggests the bank may reduce the pace of increases to 25 basis points, Carlos Kawall, chief economist at Banco J. Safra, wrote in a note to clients.

A Supreme Court ruling against the banks could prompt the government to increase taxes, Attorney General Luis Inacio Adams told court justices today.

The court yesterday postponed the ruling on the banks to February.

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