By Jamie McGeever
BRASILIA (Reuters) – Brazil’s central bank will make permanent one of its pandemic crisis-fighting measures from last year of offering banks liquidity in exchange for private sector credit as collateral, instead of public debt, as had been the case before.
In an online event broadcast by the International Monetary Fund on Tuesday as part of its spring meetings, and recorded on Thursday, central bank president Roberto Campos Neto said this will help banks and Brazil’s nascent corporate bond market.
“This changes the whole chain of issuing private debt and the way we see private debt. Banks can charge less premium when they hold private debt on the balance sheet because now they know they can get liquidity out of that,” Campos Neto said.
“This is a change that we are going to make permanent, and we are designing a system to make that permanent,” he said.
In response to the COVID-19 pandemic just over a year ago, the central bank unveiled measures providing the finiancial system with up to 1.3 trillion reais ($225 billion) of liquidity, worth around 18.5% of gross domestic product.
Central bank figures show that within that overall package, loans backed by private sector debentures totaled up to 91 billion reais.
On monetary policy and inflation, Campos Neto repeated his view that front-loading interest rate hikes means they will not need to be raised as much in the end.
Brazil’s central bank began a “partial normalization” of monetary policy last month, raising its benchmark Selic rate by 75 basis points to 2.75% and, barring a major change in outlook, pledging to do so again next month.
Inflation is running well above the bank’s year-end target of 3.75%, the exchange rate is weak, and the fiscal outlook is deteriorating. All that points to continued tightening, despite the pandemic and darkening growth picture.
Campos Neto also warned that the rise in borrowing costs in some advanced economies will result in “some level of distress” for emerging countries like Brazil.
(Reporting by Jamie McGeever; Editing by Andrew Heavens and Jonathan Oatis)
