Brazil’s credit stock falls under effect of monetary tightening

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The stock of credit in the Brazilian financial system fell 0.3 percent between December and January this year, to BRL 5.317 trillion (USD 1.027 trillion), according to the Central Bank. The decline was mainly caused by the lower volume of credit granted to businesses, which fell 2.4 percent to BRL 2.1 trillion.

At the same time, despite the high indebtedness levels of Brazilian households, there was 1.1 percent growth in family credit operations to BRL 3.2 trillion.

Although a slowdown is expected at the turn of every year when fewer companies anticipate credit card receivables or discount duplicates, this is the first monthly drop in the stock of credit since January 2021. It shows that the monetary tightening process initiated that year to contain the rise in inflation has finally affected the banking sector.

Its effects should have started to be felt in the second half of 2022, but former President Jair Bolsonaro’s fiscal and credit expansion policies delayed them.

The Central Bank projects 8.3 percent growth in the stock of credit in 2023, compared with an expansion of 14 percent in 2022.

The scandal involving retailer Americanas, which broke out in January, is also believed to be leading banks to issue fewer operations linked to corporate debt. However, it is not yet known to what extent this behavior is transient and related to the lack of clarity in the company’s recovery plan, or if it could further harm the credit market as a whole.

A slower pace of expansion would create idle capacity in the economy, reducing inflation as desired by the Central Bank but harming growth as a whole, which is worrisome for the government.

President Luiz Inácio Lula da Silva has been critical of the Central Bank’s “orthodoxy,” pointing out that the country’s 13.75-percent benchmark interest rate is excessive. He does this because he knows the crucial role that credit plays in stimulating the economy.

Creating or expanding earmarked credit programs — as suggested by the government’s economic team and the BNDES national development bank — could offset the effects of the high interest rates on the one hand, but it would also make the Central Bank’s life more difficult on the other.

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