IMF Warns Brazil of Overheating

Brazil’s economy is showing signs of overheating and heightened vigilance against financial risks are required given the pace of credit growth and continued reliance on external borrowing, the IMF says in its Article IV consultation with the sovereign. Macroprudential policies have played a helpful role in slowing credit in some segments, the IMF says, but such policies may need to be applied more broadly to gain traction. Further macroeconomic policy adjustment should continue to be a part of the response to large capital inflows, according to several IMF directors. However, overall financial indicators remain favorable, it says. The multilateral’s executive directors stress the importance of further calibrating policy mix to address an array of near-term macroeconomic pressures. The IMF says it welcomes the decision by Brazil authorities to phase out fiscal stimulus introduced during the financial crisis. Additional fiscal tightening would support disinflation and reduce the need for additional interest rate hikes. The IMF says it also supports the decision to reduce funding to BNDES.