Brazil’s New Rules Put End to a Savings Tradition

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By Mayara Vilas Boas

Brazilian Finance Minister Guido Mantega's announcement that the government will reduce returns on new deposits in national savings accounts could make room for further interest-rate cuts and help Brazil sustain its economic growth.

By offering lower returns on the savings accounts, the government hopes the Brazilian central bank can further reduce its key interest rate without causing investors to flee government bonds in favor of savings accounts, which would make it harder for the government to finance its debt. Under the new rules, the rate paid on new savings accounts will amount to 70 percent of Brazil's benchmark Selic rate, which is now 9 percent. The rule, which takes effect today, only applies to deposits made after May 3 and will only kick in when the Brazilian central bank reduces the benchmark rate to 8.5 percent or below.

Brazilian President Dilma Rousseff -- who wants to see rates more in line with international levels -- is taking advantage of her high popularity to change Brazil's most traditional form of investment and retirement savings, known as poupanca. These accounts, which are guaranteed by the government, offer a tax-free base return of 6.17 percent a year plus a fluctuating reference rate. The central bank estimates that there are 100 million savings accounts holding more than $225 billion.

Brazil's economy is slowing as demand for commodities cools, while the strength of its currency has hurt the ability of manufacturers to export. Eliminating the floor on interest rates, the government hopes, will help to bring rates down and improve the overall economy. Brazil still must develop policies to promote expansion of credit to individuals and corporations, and implement systemic reforms to reduce the cost of capital and its own debt. Brazilian banks have some of the world's highest lending rates, with spreads that often exceed 30 percentage points.

(Mayara Vilas Boas is on the staff of Bloomberg View. Follow her on Twitter.)


-0- May/04/2012 18:38 GMT