Brazil Unwinds Stimulus, Readies Hikes

Brazil’s central bank has reverted to some of its pre-crisis bank reserve requirement rules in a broader move to unwind stimulus measures adopted immediately after the beginning of the financial crisis in 2008. The move should drain an estimated BRL71bn of liquidity out of the banking system, according to the central bank. “Despite the large amount, we do not see [these measures] as a replacement for higher interest rates,” says Alexandre Schwartsman, head of Brazil macro research at Santander in a report. “Instead, we believe they represent simply a gradual return to normalcy as the effects of the financial crisis are being overcome.” Goldman Sachs also sees the moves as positive and predicts the bank will begin a 375bp tightening cycle in March, ending in October. Yesterday’s measures by the central bank, which will take effect in March and April, depending on the measure, include upping the deposit requirement to 15.0% from 13.5%; moving the exemption limit back to BRL500,000, from BRL10,000; increasing deductions for small an medium-sized institutions; and reducing portfolio acquisition-related deductions to 45%, from 100%.